FOREX, COMMODITIES, STOCKS OUTLOOK 8/11: Risk Reversal Creates Abundant Low Risk Trade Entries

Overview: Markets in controlled but broad retreat, profit taking on risk assets on dour Fed comments about slowing recovery combined with only limited, symbolic steps at stimulus. Combined with China’s slowing imports, retail sales, and PPI, and now slowing US recovery risk aversion is clearly on the rise. Across the board risk assets (stocks, industrial commodities, risk currencies) lower, safe haven assets like bonds, USD, JPY strong. Major events today focus on the UK jobs and inflation reports, Canadian and US trade balances.

STOCKS: US: Down on downbeat Fed comments about slowing recovery and a slow move towards more stimulus reflecting waning faith in the recovery.

US Bonds: Up as stocks fall: Benchmark US 10 year bond prices fractionally higher, yields down from 2.8220% to 2.7810%. NB: NOTEWORTHY DIVERGENCE: Benchmark 10 year T-bills have continued to rise during the rally in stocks that began in July – suggesting that bond markets do not believe the stock rally is justified. Historically bond markets have been more accurate market gauges, thus this is a very bearish divergence with stock trends.

Asia Stock Outlook: Down: Virtually all major Asian bourses except for Shanghai and Karachi down on follow through from the dour Fed comments on slowing US growth and its implications. Combined with slowing Chinese imports reported yesterday the picture worsens for Asian exporters. Japan’s Nikkei average fell 2.7 percent on Wednesday in thin trade, marking its worst day in nearly a month as a stronger yen deepened worries about the longer-term outlook for Japan’s economy.

European Stock Outlook: Down – All major European markets fell in early trade on continued negative reaction to news of slowing growth in the US combined with lack of any real additional stimulus that might bring relief. Prospects of declining exports to China and now to the US cast a pall over Europe’s chief economic export engines.

Crude Oil Daily Outlook: Down after resisting a break below $80 support Tuesday, oil has breached the level and is around $79.60 in midday GMT trade following global risk aversion on downbeat US Fed comments.

Gold Daily Outlook: Down: Gold futures again fell below key 1200 support in midday trade GMT after recovering in late trade yesterday, as news of slowing US recovery dampens inflation risks and calm about the EUR undermines new demand for gold.

Ag Commodities: Wheat down, sugar, coffee up, soybeans down fractionally thus far Wednesday.

FOREX Daily Outlook Tuesday-Early Wednesday trade GMT: Clear bias to safety currencies as part of general risk aversion on reduced outlook for US growth, China imports. Major calendar events from the UK, US and Canada provide potential volatility in these currency pairs. Strongest: JPY, USD, CAD, weakest: NZD, CHF, AUD. Note CAD remains relatively strong, CHF relatively weak given the risk aversion.

US Dollar Daily Outlook: Up vs. all except down vs. the JPY. The combination of Fed comments about weaker recovery and lack of inflation suggest heightened risk of more stimulus coming and thus more downward pressure on the USD, however as usual, risk aversion is overriding specific USD fundamentals. If US trade balance is worse that could slow the ongoing USD rally.

Euro Daily Outlook: Down vs. the USD, CAD, JPY, GBP, CHF up vs. the AUD, NZD. We expect the EURUSD to test down to about 1.2950 before further risk aversion is tested. See What Will Reverse The USD Downtrend? for details. EU growth typically lags that of US, so expect to see a similar slowdown in the coming months. With both China and US imports slowing the picture darkens for the EU’s core economies, which must prop up the PIIGS and other peripheral EU nations. Manufacturing data has shown mild decline but reduced ECB asset purchases is a positive.

Yen Daily Outlook: Up vs. all despite growing BoJ intervention threats, which no one takes seriously. That the data out of Japan this week has been overall negative is irrelevant, it’s a risk aversion day and that means buy the JPY.

No meaningful reversal in the USDJPY is expected until US bond rates rise. With Japanese real deflation at around 2.9% and 10 year JGBs yielding 1.1%, that means real returns on Japanese Gov. Bonds are around 4% for very low risk, and are virtually tax free for the Japanese market.

British Pound Daily Outlook: Down vs. the USD, EUR, JPY, CHF, flat vs. the CAD, up vs. the AUD and NZD. Claimant count just out disappoints with a smaller decline in jobless claims than hoped, also a downward revision of prior month data doesn’t help. The quarterly inflation report could move the GBP, as could related comments.

Australian Dollar Daily Outlook: Down vs. all except up vs. the NZD on pure risk aversion, no Aussie news since Monday’s home loans disappointment

New Zealand Dollar Daily Outlook: Down vs. all on risk aversion and worse fundamentals than the AUD

Canadian Dollar Daily Outlook: Up vs. the EUR, AUD, NZD, little changed vs. the GBP, down vs. the USD, JPY, CHF

Swiss Franc Daily Outlook: Down vs. all but the NZD.

Multi-Day Trade Ideas From Daily Charts

 

Daily Trends To Watch

With risk aversion in its 2nd-3rd day, lots of reversing risk trends at/near strong resistance.

For example: note how the EURUSD has crossed back under both its 200 day sma (purple) and its downtrend line from March.

EURUSD DAILY CHART AVAFX 33AUG11

Check out daily NZDUSD testing its June uptrend line and breaking 23.6% Fib levels

NZDUSD DAILY CHART 34AUG10

FOR THE S&P 500 – NOTE HOW UPTREND LINE AND FIB LEVEL VIOLATED NO BIG RESISTANCE UNTIL AROUND 1090

 

S&P 500 DAILY CHART AVAFX NOTE HOW UPTREND LINE AND FIB LEVEL VIOLATED NO BIG RESISTANCE UNTIL AROUND 1090 35AUG 10

Other opportunities in crude oil and other risk assets.

The question is, what news could come to keep the pullback from becoming a longer correction?

DISCLOSURE: NO POSITIONS