FOREX, COMMODITIES & STOCKS OUTLOOK 26th August 2010

Dealers’ Room Commentary
Overview
Asian stocks rose on Thursday as investors hunted for bargains among recently beaten-down shares, while the yen pulled further away from 15-year highs as investors wondered whether Japanese officials would take fresh steps to curb the currency’s strength and spur economic growth. Risk assets staged a comeback on with Gold steady on Thursday, hovering near its strongest level in eight weeks hit the previous day, with worries that the U.S. economic recovery was stalling likely to drive the metal to new highs. Oil rose for a second day on Thursday after a five-session losing streak took prices to 11-week lows, rekindling interest on the basis of technical indicators pointing to a rebound. U.S. stocks also staged a comeback on Wednesday, breaking a four-day losing streak by major indexes, as key technical support triggered bargain hunting that offset weak economic data

Currencies
EURUSD:
The EUR/USD opened the Asian session around the middle of yesterday’s 1.2607/1.2725 range, as sentiment towards the pairing is mixed. The EUR/USD was boosted by better than expected IFO data that contrasted with the much worse than expected US New Homes and Durable Goods data. Despite the contrasting data – the EUR/USD is having trouble getting traction due to the potentially USD-positive risk aversion and the global growth concerns that accompany faltering US data. A number of analysts are warning that the EUR/USD is poised to reverse higher if Bernanke indicates the Fed is ready to ramp up QE efforts by expanding the Fed’s balance sheet. Bernanke is speaking at Jackson Hole, Wyoming on Friday and the speech takes on added importance as the US data deteriorates. The EUR/USD is getting pushed around by cross flows. The Eurusd trades 1.2703/06

GBPUSD:
Japan’s government will urge the Bank of Japan to ease monetary policy further as part of a package of steps to stem the yen’s rise and support the fragile economy, the Asahi newspaper said, ratcheting up pressure on the central bank to take action before a policy meeting next month. Japanese policymakers have scrambled to talk down the yen, which rose to a 15-year high against the dollar this week, and have hinted at the possibility of intervening in the markets for the first time since 2004.The BOJ is considering easing monetary policy further at its next rate review on Sept. 6-7 or earlier, with the most likely option an expansion of its cheap fixed-rate loan programme for banks put in place in December, sources said. Prime Minister Naoto Kan is mapping out a series of steps to spur growth, such as extending the deadline for subsidies on purchases of energy-efficient electronics, but the government’s options are limited with public debt nearly twice the size of the economy. That is putting pressure on the BOJ to do its part to help the economy. Asahi said the the government package is expected to be outlined by the end of this month and will stress the need to work increasingly closely with the central bank to deal with rapid rises in the yen that are threatening Japan’s export-reliant economy. The package will also call for more action from the central bank, urging it to make its “utmost effort” to beat deflation, according to a draft of the steps cited by the newspaper. Some analysts say if the yen appreciates rapidly and shoots past 80 to the dollar, the central bank may hold an emergency meeting to decide further easing before the government package comes out. Gbpusd trades 1.5572/75

USDJPY
USD/JPY, EUR/JPY and other JPY pairs are off highs seen earlier in Asia at around the time of the Tokyo fix but remain relatively bid, awaiting further direction from abroad. The bias still looks to be to the upside with stops tipped in USD/JPY above 85.00 and EUR/JPY above 108.00. USD/JPY saw a high of 84.89 in Asia today, adding to gains to 84.83 in New York overnight as Wall Street rallied back and as US Treasury yields surged. With the Ichimoku tenkan line at 84.92 and 85.00 a recent ceiling of sorts, stops above this level are not surprising. Moves may be seen towards the Ichimoku kijun above at 85.84, a level which has capped this pair since June 22. EUR/JPY traded up to a high of 107.66 in Asia this morning, eclipsing the New York high of 107.38 as well as the London high of 107.65 by a tick. It too sees resistance at its Ichimoku tenkan line at 107.92 and ahead of 108.00 with stops above. The kijun line in the cross is up at 110.07. EUR/JPY has traded below both its tenkan and kijun lines since breaking below these two lines on August 11 as well as the base of its Ichimoku cloud. USD/JPY trades quietly at 84.73/76 and EUR/JPY at 107.60/65.

Commodities
Oil
Oil rose for a second day on Thursday after a five-session losing streak took prices to 11-week lows that investors felt anticipated disappointing U.S. economic and inventory data, rekindling interest on the basis of technical indicators pointing to a rebound. New U.S. home sales slumped to the slowest pace on record in July and orders for costly durable goods were weak, data showed on Wednesday, heightening fears the economy was at risk of another downturn. Negative statistics also prevailed in the U.S. oil market on Wednesday, after government statistics showed the nation’s total petroleum stockpiles extended an all-time high last week, with gains across the board. U.S. crude for October delivery rose 34 cents to $72.86 a barrel by 0255 GMT, after rising more than 1 percent on Wednesday, having touched an 11-week intraday low of $70.76. Prices have dropped about $10 from a peak of almost $83 on Aug 4. Front-month U.S. crude futures’ 14-day relative strength index (RSI) fell to just above 30 on Tuesday, a technical indication it was nearing an oversold condition, and then bounced on Wednesday to above 35, according to Reuters data, as taking profits on short positions after a five-day losing spell became attractive. Crude oil inventories at the key Cushing, Oklahoma, delivery hub fell 779,000 barrels to 36.3 million in the week to Aug. 20, about the only bullish feature in a weekly inventory report from the Energy Information Administration published on Wednesday. Contagion from rising stock markets on Wednesday and Thursday allowed the oil market to shrug off a bigger-than-expected gain in total U.S. crude inventories, which rose by 4.11 million barrels, according to the EIA. Gasoline inventories were 2.27 million barrels higher, at odds with forecasts of a small drawdown. Distillate stocks, which include heating oil and diesel, increased by a larger-than-expected 1.76 million barrels. In aggregate, commercial crude and product stocks rose to 1.139 billion barrels last week, topping the record weekly high of 1.13 billion barrels set in the week to Aug. 13. Also sending bearish signals, forecasters revised downwards their expectations of the oil price both for this year and next, a Reuters poll showed on Wednesday.
Gold
Gold was steady on Thursday, hovering near its strongest level in eight weeks hit the previous day, with worries that the U.S. economic recovery was stalling likely to drive the metal to new highs. Spot gold added 30 cents to $1,239.30 an ounce by 0220 GMT, having risen as high as $1,241.35 on Wednesday after the release of weaker-than-expected U.S. durable goods orders. Gold struck a lifetime high around $1,264 in June. U.S. gold futures for December delivery were barely changed at $1,241.4 an ounce after hitting an 8-week high on Wednesday. Recent poor economic data from the United States stoked fears of a double-dip recession, which prompted some investors to ditch stocks and shift to bullion. Holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, jumped nearly 13 tonnes last week, its biggest one-week climb since early June. The physical sector was muted after selling by bullion dealers resurfaced late on Wednesday as gold struck a new high, keeping premiums for gold bars unchanged at 80 cents in Singapore. High prices cut the premium in Tokyo to zero from 25 cents last week, but steady physical demand from the electronics sector prevented it from falling further. The World Gold Council said in its quarterly demand trends report that India and China were likely to provide the main thrust to demand growth this year and predicted investment demand would stay strong.

Markets
US Markets
U.S. stocks staged a comeback on Wednesday, breaking a four-day losing streak by major indexes, as key technical support triggered bargain hunting that offset weak economic data. The S&P 500 index had sagged as much as 1 percent after data showed new single-family home sales slumped to a record slow pace in July and orders for manufactured durable goods rose far less than anticipated. But positive momentum grew through the session after the benchmark S&P 500 bounced back from a breach of the 1,040 evel. In the past that level has held up as support, indicating some investors may see a dip below it as a buying opportunity. Investors who hold short positions — those who seek to profit from declining share prices — pushed markets higher as they covered their bets to lock in profits after the recent slump. Technical factors played more of a role than economic fundamentals as data showed a deteriorating pace of recovery. But the market’s gains may prove to be short lived. The S&P’s 14-day moving average fell below its 50-day moving average, and with both on the downside it suggested a negative short-term trend.
The Dow Jones industrial average rose 19.61 points, or 0.20 percent, to 10,060.06.
The Standard & Poor’s 500 Index added 3.46 points, or 0.33 percent, to 1,055.33.
The Nasdaq Composite Index gained 17.78 points, or 0.84 percent, to 2,141.54.

European Markets
European shares were set to bounce back on Thursday after hitting a five-week closing low in the previous session, drawing strength from strong equities in Asia and a late rebound on Wall Street overnight, but with some caution lingering over the outlook for the economy. Financial bookmakers expected Britain’s FTSE 100 to open 43 to 47 points higher, or up 0.9 percent, Germany’s DAX was seen up 37 to 44 points, or 0.8 percent higher, and France’s CAC-40 was expected to open up 35 to 39 points, or 1.1 percent higher. Financial bookmakers expect bargain-hunting to boost European equities after the pan-European FTSEurofirst 300 fell to a five-week closing low in the previous session, but some concern is expected to persist after weak U.S. durable goods orders and disappointing U.S. new home sales data on Wednesday sparked worries over the prospects of a global economic recovery. U.S. stocks staged a comeback on Wednesday, breaking a four-day losing streak by major indexes, as key technical support triggered bargain hunting that offset weak economic data. Equities in Asia also rose as investors picked up beaten-down stocks.

Asian Markets
Asian stocks rose on Thursday as investors hunted for bargains among recently beaten-down shares, while the yen pulled further away from 15-year highs as investors wondered whether Japanese officials would take fresh steps to curb the currency’s strength and spur economic growth. But concern about exposure to riskier assets continued to weigh on markets after U.S. data on Wednesday heightened fears that the world’s biggest economy may be at risk of sliding back into recession. U.S. new home sales slumped to the slowest pace on record in July and durable goods orders were weaker than expected, suggesting growth could slow sharply without more government or central bank support. The latest in a growing string of weak data initially pushed major U.S. stock indexes lower, but they bounced back later in the session, indicating investors may see further dips as a buying opportunity and lending support to Asian markets. The Nikkei rose 0.3 percent, lifted by what market players said was short-covering and buying of futures by long-term domestic investors, after hitting a 16-month closing low on Wednesday. But gains were capped by doubts about how much policymakers could really do to turn the ailing economy around, as well as fears of longer-term policy inaction prompted by a murky political outlook. Japan’s government will urge the Bank of Japan to ease monetary policy further as part of a package of steps to stem the yen’s rise and support the economy, the Asahi newspaper said, ratcheting up pressure on the central bank to take action before a policy meeting next month. Japan has also not ruled out market intervention to weaken the yen, though markets largely doubt such a move or further symbolic BOJ policy easing would have much effect. The benchmark Nikkei broke below 9,000 this week for the first time since May 2009. The 9,000 to 9,100 area had been strong support since last year, and market players say there will be few technical targets to break the benchmark’s further falls. The MSCI index of Asia-Pacific stocks outside Japan rose 0.4 percent, led by sectors including consumer staples and healthcare, while those most sensitive to business cycles such as technology eked out smaller gains. The index hit a 1-month low in the previous session and is down about 4 percent on the year, but has held up better than the all-country world index, which has fallen 7.2 percent. Asia’s strong economic growth apart from Japan has been a buffer against recent global shocks, with emerging markets continuing to attract foreign investors despite a broader aversion to riskier assets for much of the year.

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