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GDP Readings: US Revised Down, Germany Stable, UK Revised Up

US GDP was revised downwards from preliminary reading of +2.4% to +1.6% q/q in 2Q10  . That was still better than anticipated, and so the market viewed it positively. German GDP was in line with expectations but is expected to slow in coming quarters.UK GDP beat expectations and rose +1.2% q/q in 2Q10, compared with initial reading of +1.1%.

Continued US Fundamental Deterioration

US Housing Data

Annualized Existing Home Sales for July fell 27.2% to a record low 3.83 million (from a peak of 7.25 million in 2005)  vs. a forecasted 11% drop to 4.65 million.

New Home Sales dropped 12.4% M/M to an annual 276K, the lowest on record in a series going back to 1963. The government purchase incentives pushed sales forward, so many are now talking of further price cuts, especially in light of newly rising joblessness and stagnant incomes.  The average US home is now worth $204K, the lowest since 2003 – wiping out the gains of the bubble years.

Taken together, along with declines of prior months, the data indicates a stark lack of demand in the housing market. Housing inventory swelled to 12.5 months of sales or roughly double the ratio needed to maintain stable prices.

The news is ominous for US economic growth in H2 of 2010, July’s massive contraction is likely to have negative impact on other spending including.

Durable Goods 

The results badly missed their forecast, increasing by only 0.3% versus expectations of 3.0% rise.  Taking out the volatile transportation sector Durable Goods actually declined by -3.8% versus projections of 0.5% rise.

Added to last week’s disappointing Philly Fed report, the US manufacturing sector appears to be slowing markedly and in what may be an ominous sign for future US growth business capital spending showed a massive contraction in July. Orders for non-defense capital goods excluding aircraft declined by -8.0% – the worst such reading in 18 months.

Weekly New Unemployment Claims Beats Expectations, 4 Week Moving Average Still Rising

The DOL reports weekly initial claims was 473,000, a slight improvement over the expected 488K,  and a  decrease of 31,000 from the previous week’s revised figure of 504,000. However the decrease wasn’t enough to prevent the 4-week moving average from climbing to 486,750, an increase of 3,250 from the previous week’s revised average of 483,500.  

Bernanke Speech At Jackson Hole

As expected, Bernanke expressed guarded optimism about US growth and confidence that the Fed

has sufficient tools to stimulate the economy and combat deflation when there’s a need. Policy options include 1) additional purchases of longer-term securities, 2) modification of the Fed’s communication language, 3) reduction in the interest paid on excess reserves and 4) increase in inflation goals. It appears likely that further QE measures will be implemented, albeit not until there is enough further deterioration to convince the rest of the Fed governors.

Rising PIIGS Bond Yields

Standard and Poors downgraded Irish sovereign debt one notch to AA- adding a negative outlook on worries that bank bailouts would require even more taxpayers’ money. Generally spreads over ten-year Bund yields have widened to new records, Greece 950 basis points, Ireland 371, Italy 168, Portugal 340 and Spain a not quite record 190.

Less Prominent But Still Noteworthy

More China Real Estate Bubble Evidence

A report from a Beijing district that the majority of its properties have been vacant for years. See here for details.

Moody’s Warns On Slower EU Growth

It could lead to European sovereign debt downgrades.

ECRI WLI worsens

It’s been indicating double dip for a while now, continuing to do so.

Central Bankers Turning More Dovish,

–Axel Weber wants to delay tightening, as widely reported last week.

–Bernanke’s Jackson Hole speech suggests he’s just be waiting for more bad news on the US economy to get support of the rest of the Fed governors for more QE

–BoE voices also warn of tightening too quickly:  Dr. Martin Weale, one of the UK’s most respected economists, and  the newest member of the Monetary Policy Committee, warned that there was a real risk of a double dip recession in the UK

–BoJ may announce new easing later this week

COMING WEEK

Can The 1040 Support Level Hold For The S&P 500?

As our favorite single indicator of risk appetite, the index’s steady technical deterioration has correctly pointed to further declines in the past weeks. The 1040 level has tested and held in the past 4 session. A break below it will suggest a test of at least the 1010 level, given the lack of likely positive news coming. However, with expectations already low, stellar results aren’t needed to get a bit more upside. Note that with Friday’s rally, any close below 1043 means another bearish pair of lower-high and lower-low.  

Packed US Calendar To Update Picture of US Jobs, Manufacturing

Includes not only the week’s most important reports on US jobs, but also updates on the suddenly declining US manufacturing sector

Expectations calling for the typically market-moving Nonfarm Payrolls figure to show the economy shed 100,000 jobs in August, marking the smallest decline since the report turned negative for the first time this year in June. However, traders may be more focused on the Private Payrolls result to give a more accurate reading on the underlying strength of the labor market, because it is not distorted by census-related firings. A less optimistic forecast here, for a gain of 47,000 jobs, down from last month’s 71,000.

Other indicators are expected to produce mixed results.  Personal Income and Spending are forecasted to have increased in July, Consumer Confidence to move higher in August. The ISM manufacturing PMI is expected to drop for the fourth straight month, Pending Home Sales and Construction Spending figures are anticipated to continue falling, confirming the ongoing picture of deterioration in US housing markets.

As usual there will be a series of secondary labor market data providing hints about Friday’s jobs reports. ADP’s jobs report on Wednesday is forecasted to show an increase of 18,000 jobs in August, down from 42,000 in July.

Weekly claims for jobless benefits are tipped to remain solidly elevated on Thursday, edging up to 475,000 compared to 473,000 the week before.

Emergency BoJ Meeting May Hit The JPY

Late on Friday there were reports that the BOJ would hold an emergency meeting early next week, though no date was specified The BOJ is expected to increase its bank lending facility that provides three-month funding at 0.1% to 30 trillion yen (from 20 trillion currently) and extending the funding period to six months. Markets will be focused on whether it explicitly states that the measures are being taken to combat JPY strength. If so, it may signal a larger, coordinated effort between the government and the BOJ to weaken the JPY, and should send the USDJPY higher in the near term to around  the 87-88 range.

Wildcards

PIIGS Sovereign and Bank Bond, CDS rates – Spain, Portugal bond sales, but ECB statement unlikely to surprise

China Housing Bubble Data

News of US Banks Pressured By Asset Value Decline

Weekly Calendar Events

Monday

UK Bank Holiday though the UK’s Hometrack August Housing Survey is out,

Eurozone Confidence

US July Personal Income and Spending, plus Core PCE

Tuesday

 Japan: July Industrial and Vehicle Production, Retail Trade, Labor Cash Earnings, Housing Starts and Construction Orders, plus August Small Business Confidence

UK: July Money Supply and Consumer Credit, August GFK Consumer Confidence

EZ: German Unemployment, EZ16 CPI and July Unemployment

US: June CaseShiller House Prices, August Chicago Purchasing Managers, Consumer Confidence and Minutes of the FOMC meeting

Wednesday

Japan:  August Vehicle Sales

EZ: Manufacturing PMI’s for various European countries

UK: Halifax House Prices

US: Challenger Job Cuts, ADP Employment Change, Manufacturing ISM, Vehicle Sales and July Construction Spending

China: Mfg PMI, HSBC PMI

Thursday

UK: August Nationwide House Prices, Construction PMI

EZ: Q2 GDP, July PPI, the ECB rate decision and statement (unanimously expected unchanged at 1.00%)

US: Q2 Unit Labor Costs, July Factory Orders and Pending Home Sales

Friday

Japan: Q2 Capital Spending

UK August Services PMI

EZ:  July Retail Sales,

US:  August Non-Farm Payrolls and Unemployment, Non-Manufacturing ISM

China: Non-Mfg PMI, HSBC Services PMI

NB: Monday 6th September Labor Day holidays in Canada and the US.

Conclusion: Expectations Low, But So Is Likely Upside For Risk Assets

Keep in mind that behind all of the above is concern about the sectors that started the decline. In 2007 it was the US banks (as the US real estate bubble burst), then in late 2009 the PIIGS and the resulting EU bank trouble. Most of the big banks are in questionable health, and some are just dead men walking. Not surprisingly interbank trust remains low in the EU, cash parked overnight at central banks, top-ranked paper yielding record low rates. We can’t help but feel that we’re just waiting for the next news about which PIIGS nation is in new trouble and which banks are most exposed. Similarly, how long can the US see new declines in employment, spending, and real estate prices before its banks need new assistance?

DISCLOSURE: NO POSITIONS

Currencies
EURUSD:
Traders say they are happy to fade strength and/or weakness in the EUR/USD ahead of the US Q2 GDP and Bernanke’s speech at Jackson Hole, Wyoming later today. There is talk of good selling interest around 1.2750 while buyers are lined up around 1.2660. Stops are below 1.2650 and above 1.2770, but traders doubt they will get triggered ahead of the key events. The market is looking for the Q2 US GDP to be revised from the original estimate of plus 2.4% to 1.4%. Some analysts feared the revision could be more severe and perhaps below 1.0%. Unless the GDP comes in well outside expectations, the main event is likely going to be Bernanke’s speech. The Fed chairman has not spoken since the Fed decided to maintain their balance sheet size and buy US Treasuries with maturing mortgage bonds. There is speculation Bernanke may communicate further steps the Fed might take, which includes actually expanding the Fed’s balance sheet, which would be USD-negative. The EUR/USD trades 1.2601/06

GBPUSD:
Cable has broken below the base of its narrow 1.5515-1.5535 Asian session range in early European trade, with Ed Balls warning that an economic “hurricane” is heading towards the UK (FT website) helping weigh. Balls, an outsider in the Labour leadership contest, was the right-hand man of former PM Gordon Brown. Sell stops were tripped after the break below 1.5507 (yesterday’s Asian session base).
Bids are tipped at 1.5450/60 (1.5467 was yesterday’s early Asian session low), with further sell stops touted below 1.5450. 1.5535+ offers are touted at 1.5560, with buy stops pegged above 1.5580 and 1.5600 (1.5599 was yesterday’s low).

USDJPY
The press conference to be held by Japanese PM Kan later today on FX and fresh economic steps looks to have caused more USD/JPY and JPY cross shorts to cover. USD/JPY has seen further legs up in afternoon trading, moving up to 84.78 and levels seen yesterday. With the Ichimoku tenkan line at 84.74, it will be interesting to see if 84.78 is the extent of the USD/JPY upside. Offers trail higher well into the 85-handle but stops are mixed in above 85.00, and these could again come into focus. The Nikkei has rebounded as JPY pulled back. Stock market strength, in turn, looks to be shoring up the JPY pairs. JGB yields, on the other hand, have rebounded strongly and especially in the long-end as the yield curve steepens. The yield on the 20s has jumped 9.5 bps today, the biggest one-day rise in 22-months. Above 85.00, USD/JPY sees resistance at 85.15-20 and then 85.65-70, 85.19 and 85.68 the highs seen Tuesday and Monday, respectively. USD/JPY trades 84.69/71. The early low was 84.27. Earlier today Bloomberg put out a technical comment citing comments from a Mizuho analyst that USD/JPY could decline to sub-70. Though shrugged off by most, the article has received some attention.

AUD/USD: Markets await election this weekend and possibility of “Hung Parliament”
AUD/USD is clawing its way higher in mid afternoon trade as the so-called”risk” complex of trades continue an impressive recovery of todays lows ahead of the Jackson Hole symposium tonight. AUD/JPY is up nearly 1.0% off its lows but this move is mostly down to USD/JPY which has reversed sharply since the feeble attempt at the downside this morning. There is nothing much in the running commentary out of Japan but it appears players are taking no risks ahead of the weekend. EUR/USD is also have another stab at the topside, helped along by the EUR/JPY which is also up nearly 1.0% from its earlier low. AUD/USD last trades at 0.8872.
Commodities
Oil
Crude oil traded near a six-week low as rising U.S. jobless claims and a contraction in manufacturing added to concern growth in the world’s biggest oil-consuming nation is slowing. Oil, down 1.3 percent this week, fell yesterday after the Labor Department said weekly claims for unemployment benefits climbed to the highest level since November. The Federal Reserve Bank of Philadelphia’s general economic index dropped to the lowest reading since July 2009. Total U.S. petroleum inventories reached the highest in at least 20 years, Energy Department data showed earlier this week. Crude for September delivery was at $74.42 a barrel in electronic trading on the New York Mercantile Exchange, up 2 cents, at 0545GMT. The contract expires today. Yesterday, it fell 99 cents, or 1.3 percent, to $74.43, the lowest settlement since July 7. The more actively traded October contract was up 3 cents at $74.80. Futures are set for a second weekly drop. Oil, which topped $87 a barrel in early May, has fallen 6.2 percent this year amid concern the slow pace of economic growth would curb the global recovery in fuel demand. U.S. total petroleum stockpiles climbed 5.3 million barrels to 1.13 billion in the week ended Aug. 13, the highest level since at least 1990, an Energy Department report showed Aug. 18. Oil may fall next week on signs the U.S. economic recovery is slowing, bolstering stockpiles, according to a Bloomberg News survey. Seventeen of 44 analysts and traders, or 39 percent, forecast crude will decline through Aug. 27. Fourteen respondents, or 32 percent, predicted futures will increase, and 13 said there would be little change. Last week, 56 percent of survey respondents projected a drop.
Gold
Gold, trading little changed, may extend gains and approach a record as investors step up purchases to protect their wealth amid concern that the global economic recovery is faltering. The metal touched a seven-week high yesterday and is headed for a third weekly climb, the best run since June, when the price surged to an all-time high. Holdings increased in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion. The price jumped to $1,237.50 yesterday after U.S. jobless claims climbed. That was the highest intraday level since July 1 and compares with the June 21 peak of $1,265.30. Many believe that the gains on Gold will continue into next week. Initial U.S. jobless claims in the week to Aug. 14 jumped to the highest level since November, Labor Department data showed, while manufacturing in the Philadelphia region shrank for the first time in a year. Asian equities declined today. Gold has climbed 12 percent this year, heading for a tenth annual gain and outperforming equities, on signs that global growth may be losing momentum. December-delivery futures dropped 0.1 percent to $1,234.30 an ounce on the Comex in New York. Holdings in the SPDR Gold Trust gained 3.95 metric tons to 1,299.47 tons as of Aug. 19, according to the company’s website. Holdings are 1.6 percent less than of June’s record.
Markets
US Markets
The frail U.S. economy received fresh setbacks as new U.S. jobless claims scaled a nine-month high last week and Mid-Atlantic manufacturing shrank in August for the first time in more than a year. Other data released on Thursday, including a lackluster gain in a gauge of future activity last month, also implied that expansion had lost momentum after a brisk first quarter, though economists cautioned against interpreting the reports as signs of an impending double-dip recession. Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 last week, the highest since mid-November, the Labor Department said, and the third straight week of gains — a trend last seen in January. Financial markets had expected claims to slip to 476,000. Separately, the Philadelphia Federal Reserve Bank said its business activity index dropped to minus 7.7, the lowest since July 2009, as new orders and shipments fell and the employment situation deteriorated. The index was at 5.1 in July and August’s fall confounded markets that had expected a rise to 7.0. It also raised the risk of contraction in overall national manufacturing activity, which has been leading the economy’s recovery from its most painful recession since the Great Depression of the 1930s. Stocks on Wall Street tumbled and the broader Standard & Poor’s 500 index suffered its lowest close in nearly a month. U.S. government debt prices rallied, with the yield on the two-year Treasury note falling to a record low. Bond yields move inversely to prices. The U.S. dollar fell to a near 15-year low against the yen but rose against the euro. The latest data, including a third report showing the Conference Board’s index of leading economic indicators rose 0.1 percent in July after dropping 0.3 percent in June, reinforced signs of sluggish third-quarter growth. The economy’s poor health, characterized by a 9.5 percent unemployment rate, has handed President Barack Obama a tough challenge and put at risk the Democratic Party’s majorities in the U.S. House of Representatives and Senate in November’s congressional elections. Obama on Thursday cited the weak data as he implored the Senate to pass a stalled bill to help small businesses, which have been hit hard by tight access to credit.”They need help and if we want this economy to create more jobs more quickly we need to help them,” Obama said.

European Markets
European shares are expected to fall for a third straight day on Friday, with sharp declines in Asia and on Wall Street following disappointing U.S. economic data seen prompting investors to stay cautious in holiday-thinned trade. Financial bookmakers predicted Britain’s FTSE 100 to open 5 to 8 points lower, or as much as 0.2 percent; Germany’s DAX to open 9 to 20 points down, or as much as 0.3 percent, and France’s CAC-40 to fall 11 to 12 points, or as much as 0.3 percent down. U.S. stocks tumbled to their lowest close in nearly a month on Thursday, while the FTSEurofirst 300 index of top European shares fell 1.5 percent to 1,036.84 points, the lowest close since July 21. Volumes on the index were 70 percent of its 90-day daily average.
Asian Markets
Following falls seen on Wall Street overnight, the Nikkei was off to a very weak start, falling close to 1%. Gapping down to open at 8811.47, it edged down a bit more to 8810.46 before bouncing. It was on its way down again before news that Japanese PM Kan will be holding a press conference later today to address JPY strength and economic weakness hit the wires. JPY sold off almost immediately and this helped stocks bounce. A high of 9021.75 was seen prior to the TSE close. Asian bourses in general followed the Nikkei higher from early lows though some remain in negative territory.

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.

STOCKS: US: Down – Continuing down, making lower lows on appalling US housing data. After falling below its 50 day SMA last Thursday, the S&P 500 tried but failed to breach it. Futures stable in midday GMT trade Wednesday.

Stocks lower in four straight sessions for a cumulative loss of 3.9%. Existing home sales figures for July. Sales plummeted 27% month-over-month to a yearly rate of 3.8 million units. Not only is that far below the 4.7 million units that had been expected, but also the rate of decline and the actual sales level were the worst ever since recorded (began in 1999)

The major equity averages opened trade with losses of about 1%. The opening slide reflected the weak action of markets overseas, where Germany’s DAX dropped below its 200-day moving average for the first time in more than one month and Japan’s Nikkei entered bear market territory. The Shanghai Composite mustered a modest gain, but it also near bear market territory.

Sellers intensified their efforts with the release of existing home sales figures for July.

Hope for a revival in housing was further dashed with news that the total supply of homes now stands at 12.5 months. That said, some believe a double dip in housing is far more likely. Considering the centrality of US housing to the current US and global downturn as it effects banks, jobs, spending, etc, the report adds further weight to the growing double-dip recession thesis. It is also a resounding condemnation of US attempts to stimulate housing as futile as long as the jobs picture remains bleak.

Such pessimistic headlines sent the three major indices set fresh one-month intraday lows – the Dow even briefly dropped below 10,000 – but some near-term support helped stocks stem their losses.

Near term resistance for the S&P 500 is its 50 day SMA at 1079. Traders could consider going long once this level is breached. Near term support level of 1060 was broken. Next: 1040 (includes 50% Fib retracement from July 2009) then 1010. Traders looking to go short should look to enter on breaches of these levels, with exit targets just before the next support level. Remember your risk management-stop loss levels should be close enough to the entry point so that the distance from entry point to stop loss should be 1/3rd or or less the distance from entry point to profit target, to allow for a 3:1 reward: risk ratio.

Bellwether S&P 500 in serious technical breakdown, suggesting more downside ahead. See the stocks section of August 23rd – 27th Quick Review/Preview: Stocks, Commodities, Forex for details

US Bonds: Up- Benchmark 10 Year Note up with falling stocks, with yield down from 2.6070% to 2.4990%.

Asia Stock Outlook: Down- Most major Asian markets down Japan’s Nikkei average hit a 16-month closing low on Wednesday, at one point falling more than 2 percent, as weakness in the US pressures stocks throughout Asia, and disappointment over the lack of Japanese policy action to rein in the strong yen, which threatens a fragile economic recovery, pressures stocks in Japan.

European Stock Outlook: Down – Most major European bourses tracking US lower on building evidence of economic slowdown, despite rising M&A activity. After attempting to break higher after a lower open, stocks have slid back into the red on poor US data and US, Asian stock performance.

Commodities Outlook Tuesday-Early Wednesday: Futures mixed. Energy weak, gold up, wheat, sugar stable, corn, coffee, soybeans down. Note that most soft commodities have been in major up-trends since July and these remain intact, though many are flattening out

Crude Oil Daily Outlook: Down- Following stocks, continuing its Thursday breakdown after bad US jobs and manufacturing data sent it below strong 4 month support of $75. Futures currently just below $72, down slightly from $72.28 24 hours ago, down from $73.70 48 hours ago, next near term support on daily charts is at its 61.8% Fibonacci retracement from its May 2009 low, just above $71. Bloated US refined products inventories add further downside pressure, as does Sudan’s announcement that it will expand production by about a third in the coming 2 years.

Gold Daily Outlook: Up: Futures up 1.3% over the past 24 hours, currently around $1236 up from $1220 in the past 24 hours, as weak US data currency concerns bullish momentum aid gold. NB hedge funds are heavily long, making gold vulnerable, though a near term test of its highs around 1265 appears likely

FOREX Daily Outlook Tuesday-Early Wednesday trade GMT: Bias to safety currencies but many exceptions, some clear daily rotation occurring. Yesterday CHF weakest, today is strongest, JPY second strongest, USD third. CAD, GBP remain weakest in that order GBP suffers on BoE comments that UK may tip back into recession, CAD from weak oil, stocks.

US Dollar Daily Outlook: Up vs. the, GBP, commodity dollars down vs. the EUR JPY, CHF. Per latest COT report, large speculators are long 3.8 to 1 short. Benefitting from risk aversion, lower stocks, but still the #3 safe haven choice behind the JPY and CHF. Ironically getting a short term boost from bad US housing data in its role as safe haven, though longer term the housing data is negative for the USD fundamentals as it suggests more QE, a longer wait for rising interest rates.

Euro Daily Outlook: Up vs. the USD on bad US housing data vs. better German data, GBP, all commodity dollars, flat vs. the JPY but rising thus far today recouping all of yesterday’s losses, down vs. the CHF. Getting a reaction bounce after yesterday’s drop and bad US housing data, also good German Ifo report.

Yen Daily Outlook: Up vs. all except down vs. the CHF, flat vs. the EUR which is recouping yesterday’s losses vs. the JPY thus far today. Per latest COT report, large speculators remain 5:1 long, small speculators slightly net short, bullish for the JPY. However while a currency can remain oversold for a long time it becomes increasingly vulnerable to any negative developments or risk appetite.

Up strongly yesterday but losing ground vs. most fx thus far today, though net still up over the past 24 hours unless otherwise noted.

British Pound Daily Outlook: Down EUR, USD, JPY, CHF AUD, NZD flat vs. the CAD on BoE official comments that the UK economy risks slipping into double-dip recession.

Australian Dollar Daily Outlook: Down vs. all except up vs. the CAD, though recovery vs. many thus far today.

New Zealand Dollar Daily Outlook: Down vs. all except up vs. the GBP, CAD

Canadian Dollar Daily Outlook: Down vs. all for the third day straight, pressured by falling stocks, oil, risk appetite, and falling rate increase expectations, after a long rally made the Loonie ripe for a correction.

Swiss Franc Daily Outlook: Up vs. all as today’s preferred safe haven on a strong risk aversion day, continuing to gain vs. most major fx.

DISCLOSURE: NO POSITIONS

As I tried to sort it out, here’s a summary of the arguments, track record and risks of each. Dear Reader, I welcome your input (and so should our economic elites, who clearly share my uncertainty).

The Basic Argument Against Austerity

On a private individual level austerity makes sense. However it is not as applicable to governments because spending cuts reduce GDP and tax revenues and risk making a recession worse. That’s expected in the short term, but the risk is that the economy never escapes the spiral of lower GDP making debt reduction harder if not impossible. Even if austerity would ultimately work, democracies may lack the political will to stay the course until it works, if the economic suffering provokes enough popular opposition.

The metric everyone is watching is the debt/GDP ratio.

So the big question becomes, when austerity plans take effect, will debt shrink faster than GDP so that debt service costs drop and national finances can return to health.

Greece Brief Case Study

An August 18thDer Shpiegel article suggested that while Greece has made great progress cutting debt, it nonetheless may be entering a death spiral in which GDP may fall too fast for Greece to pay even its reduced spending obligations and debt service, making recovery impossible without outright bailouts, defaults, or debt restructure.

The report noted that some areas are suffering from 70% unemployment, businesses are closing, tax revenue needed for closing the budget gap is falling, and that social tensions are reaching a boiling point. Together these raise doubts about not only whether austerity will work for Greece, but even if it ultimately could, can Greek society bear the pain before abandoning the program before meaningful improvements occur. See here for the full article. FYI many credited the report with contributing to the general market drop the following day, particularly in the Euro.

Meanwhile, the European Commission announced last Thursday that Greece’s budget reduction justified payment of the second tranche of €9 bln ($11.57 bln) in Euro-zone financial aid in September, deferring any immediate Greek crisis for a few months, though Greek bond and CDS rates are once again spiking towards Spring 2010 crisis levels

Ireland Brief Case Study

Ireland has been a poster child of voluntary adherence to strict austerity programs. However it’s not making progress in restoring its government balance sheet to health.

News of a new Irish bank bailout on August 11th officially ended the Euro’s summer rally, sending it, and markets in general sharply lower. The bailout was correctly seen as adding significantly to Ireland’s sovereign debt burden. Ireland still managed to stage a successful bond auction, though it’s unclear if demand was genuine or via ECB manipulation to restore shaken confidence. On August 23rd Standard and Poor’s downgraded Ireland’s credit rating from AA+ to AA, with a negative outlook. That means more downgrades could follow. On August 23rd it was reported here that Ireland’s bond spreads (over German bunds) are now back to crisis levels seen in May.

FT.com via businessinsider.com 01aug25o

Spain Brief Case Study

Spain has also been making vigorous efforts to reign in its deficits, with similar effects on GDP. It too is seeing rising CDS spreads that will complicate its recovery. See here for a detailed look at Spain’s deteriorating growth and debt situation.

Other Austerity Opponents

There have been additional repeated reports here and here (by assorted economic heavyweights like Nobel Prize winning economist Joe Stiglitz) questioning whether austerity measures will not only fail to restore nations to fiscal health but may make their economies even weaker, throwing them into double dip recession or outright depression

Nomura Bank Chief Economist Richard Koo has also argued extensively that the nature of the current global downturn, a ‘balance sheet recession,’ characterized by the bursting of a debt-financed asset price bubble that leaves many private sector balance sheets with more liabilities than assets, cannot return to self sustaining growth until private sector balance sheets are repaired, which requires continued stimulus. See here for details.

Pro-Austerity Arguments

Here’s the short version. Keynesian pro-stimulus approach has also failed to produce thus far in the current crisis, if in fact it ever really worked in the past,  and the end result is likely to be worse than that of austerity. Stimulus merely delays the collapse until the time when bond markets no longer accept the sovereign debt that funds the stimulus at affordable rates (or at least threaten to do so soon). When it comes, the collapse is much worse due to the accumulated mountain of debt and deeply devalued currency. No nation has ever inflated their way into prosperity.

In response to Richard Koo, David Merkel responds:

Stimulus thus far in the US, EU, and UK has also failed to spark unequivocal recovery, and recent data suggests the US and most of the EU may be tipping back into recession, if in fact they ever exited it. Concerning the US, Dave Rosenberg of Gluskin Sheff says the US has remained in recession.

Andy Xie argues against stimulus programs here , essentially because capital released winds up flowing to emerging markets were production costs are lower and demand growth is higher, thus failing to aid the intended economies and sparking inflation in the emerging markets that will ultimately spread to the still stagnant developed world economies.

Conclusion: Which Is The Lesser Evil? Depends Which Risks You Fear More

It is not clear whether austerity or continued stimulus is the way to go, and the confusion appears to be at the highest private and official levels, with the US opting for more stimulus and the EU and UK enacting austerity. Neither has worked thus far, but advocates of both approaches would argue that merely more time is needed to prove their approach correct.

What is clear is that neither stimulus nor austerity has worked yet. Meanwhile here is a summary of the risk each approach presents.

Austerity: kill off nascent recovery so that GDP fails to grow faster than debt falls, locking the economies into a death spiral of lower GDP, inability to pay off debts or even the need to add debt. Meanwhile contracting growth and unemployment risk social unrest and political instability. Current examples of failed austerity thus far include Ireland and Greece.

Stimulus: Has yet to provide conclusive recovery, though advocates say it has averted a much worse contraction thus far. Opponents argue that crash has merely been delayed and will be worse due to the massive additional debt burden and /or currency devaluation and possible hyperinflation if liquidity is withdrawn too late. The argument is somewhat complicated because Quantitative Easing involves giving money to banks, and that money can neither cause inflation nor aid recovery if banks choose to simply retain the funds to repair their own balance sheets and/or refrain from all but the safest lending. At some point once recovery gets moving they will start lending, and that is when the inflation risks start, unless central banks are adept at quickly withdrawing the liquidity from bank coffers.

Disclosure: No Relevant Positions

Currencies
EURUSD
EUR/USD opened in Asia at 1.2630 today after falling from 1.2670 late in the NY session on news that S&P had downgraded Ireland. From there we managed a low of 1.2616 on residual selling before profit takers emerged in early Asia provided support. Asian bourses have been negative and mostly down over 1% but the currency market consolidated overnight moves, unwilling to break new ground with EUR/JPY buying helping take EUR/USD to a high of 1.2667 so far. EUR/JPY opened at 106.02 after being sold off late in NY on the S&P Ireland news and dipped slightly to a low for the day of 105.90 before the profit taking early and EUR/JPY buying after lunch saw the pair up to 107.00. The usual mission statement comments from the Japanese FinMin saw JPY crosses come off late in the session with the Nikkei last down 1.78% and on its lows for the day. EUR/GBP did little, opening 0.8201 and trading 0.8197/08.
E.Z. data sees German Ifo numbers scheduled for release tonight at 08.00GMT with U.S. Core Durable Goods and New Home Sales a must see tonight given their event risk potential.

GBPUSD
Following the break below key support overnight, cable opened in Asia on its lows at 1.5396, with cable falling late in the NY session on news that S&P downgraded Ireland. This saw EUR/USD fall quickly taking risk pairs along for the ride. Despite the negative lead from Wall Street and the poor performance of Asian bourses today, Cable has regained some lost ground managing a high so far of 1.5433, as the market takes profit and consolidates overnight moves as Asia tends to do. JPY crosses all opened on their lows today following the S&P inspired late NY EUR/USD sell off and have worked their way higher with EUR/JPY buying seen leading the way after lunch although risk is certainly not on today in Asia and the moves we have seen can be put down to profit taking. GBP/JPY opened on its lows at 129.20 steadily worked its way to a 130.30 high so far. EUR/GBP has done little, opening at 0.8201 and trading a 0.8198/07 range so far.
No U.K. data tonight but German Ifo at 08.00GMT and U.S. New Home Sales at 14.00GMT are must see items
USDJPY
Both USD/JPY and EUR/JPY have come off after bouncing to 84.51 and 107.00 post-Tokyo fix. Demand for foreign currency was strong then and short-covering on the increased threat of Japanese solo FX intervention helped. Verbal Japanese intervention will likely help support these pairs going forward. That said, EUR’s trend still looks to be down and USD/JPY too is vulnerable to more moves to the downside with stops now set below 83.50 and 83.00. More are likely in 50-tick increments below, in line were presumed option barriers are probably set. USD/JPY currently trades quietly at 84.22/23 and EUR/JPY at 106.48/51. They saw lows of 83.91 and 105.90 earlier today in Asia. Overnight saw these pairs down to 83.58 and 105.44, respectively

Commodities

Oil
Crude bounced from a seven-week low on Wednesday as investors looked for relief in U.S. durable goods and oil inventory reports due later in the day, after fears of a double-dip recession intensified with dismal housing data. U.S. crude for October delivery added 26 cents to $71.89 a barrel by 0415 GMT, after trading as low as $71.32, replicating Tuesday’s trough, which was the lowest intraday price since July 6. The front-month contract on Tuesday ended at $71.63, the lowest settlement since June 7.
ICE Brent for October rose 45 cents to $72.83 a barrel. Oil slid 2 percent on Tuesday on news that sales of previously owned U.S. homes dropped by a record 27.2 percent in July, sending global equities to one-month lows. Japan’s Nikkei average fell to its lowest in 16 months on Wednesday after the yen hit a 15-year high versus the dollar. But U.S. crude stockpiles unexpectedly fell last week, an industry report showed late on Tuesday, stirring hopes that government statistics due Wednesday would show an improvement in oil demand by the world’s largest user. The front-month U.S. crude contract also touched oversold territory for the first time in three months on Tuesday, according to the relative strength technical indicator, which signals a rebound is to be expected. U.S. crude stocks posted a surprise drop of 1.8 million barrels in the week ended Aug 20, according to a weekly report from the American Petroleum Institute late on Tuesday, ahead of government statistics to be released on Wednesday by the Energy Information Administration at 1430 GMT. Forecasts are for a 200,000-barrel gain, a Reuters poll showed. But U.S. gasoline stockpiles unexpectedly rose by almost 700,000 barrels last week, the API said, while inventories of distillate fuel, including diesel, rose a larger-than-predicted 1.9 million barrels. Last Wednesday, the EIA said U.S. combined commercial stockpiles of crude and refined products in the week to Aug. 13 hit the highest level since weekly records began in 1990, and the highest level since 1980 according to the agency’s monthly data.

Gold
Gold rose on Wednesday despite a slight drop in ETF holdings, with more poor data from the
United States likely to spur buying by investors worried about the health of the global economy.
But thin volume ahead of the release of U.S. durable goods data showed the gains were driven mainly by speculators as higher prices also spurred selling of gold bars in Singapore. Gold added $1.40 to $1,230.65 an ounce by 0324 GMT, having dropped to its weakest level in nearly two weeks around
$1,210 on Tuesday before bouncing to more than $1,235 after sales of previously owned U.S. homes took a record plunge in July. U.S. gold futures for December delivery fell $1 to $1,232.4 an ounce after rising as high as $1,237.50 on Tuesday. In theory, economic worries will lift gold’s safe haven appeal in times of uncertainty, but the metal’s previous attempts to hit new highs have been met by profit taking. Gold struck a lifetime high around $1,264 an ounce in June. The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings slipped to 1,297.948 tonnes by August 24 from 1,299.468 tonnes on August 19. The holdings hit a record at 1,320.436 tonnes on June 29.

Markets
US Markets
U.S. stocks fell to their lowest level in seven weeks on Tuesday as an unexpectedly large drop in home sales ratcheted up concerns that the economic recovery is even weaker than had been feared. The Dow and S&P 500 racked up their fourth day of losses in a row after an industry group reported that sales of U.S. existing homes in July fell to their slowest pace in 15 years. With housing a linchpin of the U.S. consumer economy, the latest data cast doubt on the pace of recovery and added fuel to investors’ recent search for safety. Prices of U.S. Treasuries soared, sending two-year yields to another record low. On the S&P 500, defensive plays telecoms and utilities were the only sectors to gain for the day.
Economically sensitive companies were the biggest drags on the Dow, including plane maker Boeing, which fell 3.7 percent to $60.93. Banks were also among hardest hit shares, with the KBW Bank index down 2.2 percent. Home building and related stocks slipped but came off their lows after hitting technical support. The PHLX housing index fell 1.1 percent to 89.53, clawing back from a 3 percent
drop after it encountered support near its July low, right above 87.

The Dow Jones industrial average fell 133.96 points, or 1.32 percent, to 10,040.45.
The Standard & Poor’s 500 Index shed 15.49 points, or 1.45 percent, to 1,051.87.
The Nasdaq Composite Index lost 35.87 points, or 1.66 percent, to 2,123.76.

European Markets
European shares fell to a one-month closing low on Tuesday as disappointing U.S. housing
data underscored concern over the pace of recovery in the world’s largest economy. The pan-European FTSEurofirst 300 index of top shares closed down 1.6 percent at 1,019.52 points, its lowest close since late July, after ending higher a day earlier on a pick-up in merger and acquisition activity. Data showed sales of existing U.S. homes fell more steeply than expected in July to a 15-year low, suggesting the economic recovery could be losing momentum. The downbeat data also drove investors into safe-haven bonds, with German Bund futures hitting a new record high.

Across Europe, Britain’s FTSE 100 , Germany’s DAX and France’s CAC 40 were down 1.3 to 1.8
percent.

Asian Markets
Asian stocks fell on Wednesday, with Japan’s Nikkei at a 16-month low, as investors sold riskier assets after a spate of worrying U.S. economic data, while the yen slipped from a 15-year high on a report Tokyo was considering weakening its currency. The dollar rose 0.6 percent against the yen to 84.37 yen on short-covering, having pulled up from a 15-year low of 83.58 yen hit on trading platform EBS on Tuesday. Adding to investors’ worries about exposure to riskier assets, key U.S. stock indexes fell as much as 1.7 percent overnight after an unexpected plunge in existing home sales amplified fears that the economy could be sliding into a prolonged period of stagnation or even recession. Chicago Federal Reserve Bank President Charles Evan said the risks of a double-dip U.S. recession have risen in the last six months. While he added he did not think that was the most likely scenario, he said high unemployment and a fractured housing sector would make the recovery a fragile one. U.S. stock futures, though, were up 0.3 percent on Wednesday, with bargain hunters expected to provide some support. That eased the blow on Asian stock markets, but an unmistakable falling trend in government bond yields around the world reflected deep unease about the prospect of another recession.
Japan’s Nikkei share average fell 0.85 percent after earlier hitting the lowest since May 2009.
The MSCI index of Asia Pacific stocks outside Japan slipped 0.35 percent.

STOCKS: US: Down – Continuing down, making lower highs and lower lows on lack of any justification for moving higher, despite more merger activity. After falling below its 50 day SMA last Thursday, the S&P 500 tried but failed to breach it. Futures continuing down in midday GMT trade Tuesday.

Near term resistance for the S&P 500 is its 50 day SMA at 1079. Traders could consider going long once this level is breached. Near term support levels: 1060, then 1040 (includes 50% Fib retracement from July 2009) then 1010. Traders looking to go short should look to enter on breaches of these levels, with exit targets just before the next support level. Remember your risk management-stop loss levels should be close enough to the entry point so that the distance from entry point to stop loss should be 1/3rd or or less the distance from entry point to profit target, to allow for a 3:1 reward: risk ratio.

Bellwether S&P 500 in serious technical breakdown, suggesting more downside ahead. See the stocks section of August 23rd – 27th Quick Review/Preview: Stocks, Commodities, Forex for details

US Bonds: Up- Benchmark 10 Year Note up with falling stocks, with yield down slightly from 2.6120% to 2.6070%, still near a 15 month low.

Asia Stock Outlook: Mixed/Down- Most major Asian markets down on low volume as markets continue to price in last week’s downgraded view of global growth and major players take profits. The Nikkei closed at a 15 month low, below 9000, on concerns that a continued strong Yen will hurt Japan’s weak recovery and inaction by Japan to weaken the Yen. Shanghai still has modest gain. Nikkei now down 21% since April,

European Stock Outlook: Down – All major European bourses tracking US lower on building evidence of economic slowdown, despite rising M&A activity. Low interest rates, inflation, cost cutting, stagnant wages and emerging market growth have allowed corporate earnings to progress despite the economic deterioration in most of the developed world. Solid German data and EZ industrial orders overridden by risk aversion.

Commodities Outlook Monday-Early Tuesday: Futures mixed. Energy weak, wheat, soy stable, sugar, coffee, rising, corn falling. Note that most soft commodities have been in major up-trends since July and these remain intact, though many are flattening out

Crude Oil Daily Outlook: Down- Following stocks, continuing its Thursday breakdown after bad US jobs and manufacturing data sent it below strong 4 month support of $75. Futures currently around $72.28, down from $73.70 24 hours ago, next near term support on daily charts is at its 61.8% Fibonacci retracement from its May 2009 low, just above $71. Bloated US refined products inventories add further downside pressure, as does Sudan’s announcement that it will expand production by about a third in the coming 2 years.

Gold Daily Outlook: Down fractionally: Futures continuing to trade in tight range, currently around $1221 down from $1230 in the past 24 hours, pressured by a rising USD. Still within about 3% of its all time high, strong uptrend intact, suggesting a coming test of the $1260 area. Any spiking of PIIGS bond or CDS rates or other EU debt/banking crisis deterioration could well push it to new highs as concern for the EUR’s stability has been the driver of gold’s rally this year. Rising demand anticipated from the coming India holiday season.

FOREX Daily Outlook Friday-Early Monday trade GMT: Bias to safety currencies but many exceptions, quiet trade thus far. JPY, USD strongest, CAD, GBP, CHF weakest. JPY benefits from risk aversion and BoJ comments that suggest no intervention, GBP suffers on BoE comments that UK may tip back into recession.

US Dollar Daily Outlook: Up vs. the EUR, CAD, AUD, NZD, GBP down vs. the JPY, CHF. Per latest COT report, large speculators are long 3.8 to 1 short. Benefitting from risk aversion, lower stocks, but still the #3 safe haven choice behind the JPY and CHF.

Euro Daily Outlook: Down vs. the USD, JPY, AUD, NZD up vs. the CHF, GBP CAD . Pressured by Bundesbank President Weber’s downbeat outlook for the EZ and continued concerns about Greece and rising bond and CDS rates for some of the weaker PIIGS nations like Greece, Portugal. Strong German import, export growth may help but overall risk aversion is likely to override this data and keep the EUR under pressure.

Yen Daily Outlook: Up vs. all thus far today, moving strongly against the CAD, GBP, EUR, CHF on risk aversion flows and no sign of intervention from Japan. Per latest COT report, large speculators remain 5:1 long, small speculators slightly net short, bullish for the JPY. However while a currency can remain oversold for a long time it becomes increasingly vulnerable to any negative developments or risk appetite.

Flash Alert: USDJPY approaches 1995 low of 84.45 as MoF talks down BoJ intervention threat in currency markets.

British Pound Daily Outlook: Down vs. all except up vs. the EUR, on BoE official comments that the UK economy risks slipping into double-dip recession

Australian Dollar Daily Outlook: Up vs. the CHF, EUR (but losing ground to both thus far Tuesday), GBP, down vs. the JPY, USD NZD, CAD. Giving back yesterday’s gains vs. most fx thus far Tuesday

The AUD rose vs. most fx Monday on the realization that whatever coalition comes about will most likely further weaken or eliminate the proposed large tax increase on mining companies, which is good for the AUD. Giving back those gains thus far Tuesday

New Zealand Dollar Daily Outlook: Down vs. the USD, JPY, up vs. GBP, EUR (but falling vs. the EUR today), CHF, CAD, but reversing lower thus far Tuesday vs. the AUD and CHF.

Canadian Dollar Daily Outlook: Down vs. all for the second day straight, pressured by falling stocks, oil, risk appetite, and falling rate increase expectations, after a long rally made the Loonie ripe for a correction.

Swiss Franc Daily Outlook: Since Friday down vs. the GBP, JPY, USD, EUR, AUD, NZD up vs. the CAD, as of midday Monday GMT dropping vs. the USD and JPY, gaining vs. the commodity dollars. Generally continuing to drop thus far today.

DISCLOSURE: NO POSITIONS

Currencies
EURUSD:

The euro hit a six-week low of $1.2618 as the loss of key technical support led speculators to short the single currency in the hope of forcing stop-loss sales against both the yen and the dollar. Bears were targeting $1.2605, the 50 percent retracement of the euro’s rise from a four-year low of $1.1876 in June to its August peak of $1.3334. A break here would open the way to at least $1.2520 and then $1.2479, daily lows from July. The euro extended its losses against the yen to hit its lowest level in about nine years, as speculators sold the euro in the hope of forcing stop-loss selling. The euro fell as low as 107.21 yen on trading platform EBS, its lowest since November 2001. It later edged back to 107.35 yen, down 0.4 percent on the day.

GBPUSD:
Trend clearly remains down and we look to sell bounces back to the falling TL capping at 1.5584 today, stopping above 1.5620 and targeting a move down to 1.5120/30. This morning’s break below 1.5464 low is expected to see the price accelerate towards support at 1.5259. Overall above 1.5720 needed to shift focus
USDJPY
Afternoon Tokyo trading has seen USD/JPY dip once more, trading down to a new low for the session of 84.85. Surprisingly, EUR/USD looks to be on the bounce and EUR/JPY has steadied as a result. The push lower in USD/JPY thus looks to be more of an USD move. Bidding interest from Japanese players has been noted on the way down and more are seen to 84.50 and 84.00. Stops remain mixed in sub-84.70, 84.50 and 84.00. USD/JPY trades 84.93/96.

Commodities
Oil
Crude fell for a fifth day and gasoline component RBOB tumbled to a 6-½ month low, as the dollar strengthened and the end of U.S. summer holidays approached without triggering a seasonal stockpile drop. U.S. crude for October delivery fell as much as 56 cents to $72.54 a barrel, the lowest price since July 7. It was down 33 cents at $72.77 by 0250 GMT.
Prices of gasoline component RBOB for September delivery slumped to a fresh trough of 186.65 cents a gallon on Tuesday, the lowest intraday price since early February. The dollar gained about 0.25 percent against a basket of currencies on Tuesday. Crude inventories in the U.S. were forecast to have climbed 800,000 barrels last week, a Reuters survey showed, while stockpiles of distillates including heating oil and diesel may have advanced 1 million barrels, in what would be their 13th consecutive weekly gain.
Gold
Gold slipped to its lowest level in nearly a week on Tuesday as weaker equities prompted
speculators to sell bullion to cover losses, but an expected drop in U.S. existing homes sales could spur a rebound. Lower prices attracted bargain hunters from Indonesia, Thailand and Hong Kong but volume was low. Silver, platinum and palladium were under pressure from weak bullion and declines in
the Nikkei . Gold fell $2.90 an ounce to $1,220.50 by 0239 GMT after hitting a low of $1,219.30, its weakest since August 18. It jumped to a 1-½ month high at $1,237.15 last week after a trail of poor U.S. data knocked confidence in the economic recovery. Demand in India, the world’s largest gold consumer, rises during the festive season, which begins with Raksha Bandhan next week and lasts through November with Dhanteras — the single-biggest gold buying day. U.S. gold futures for December delivery dropped $6.1 to $1,222.4 an ounce. Investors await the release of U.S. existing home sales,
which are expected to show a drop of around 12 percent in July, underlining the weakness of the housing market. Lacklustre U.S. data could boost gold’s safe-haven appeal in times of uncertainty.

Markets
US Markets
U.S. stocks slipped in one of the lightest volume sessions of the year on Monday as investors
took refuge in defensive shares after the latest corporate M&A failed to soothe concerns the recovery is stalling. Technology shares weighed on the broad market and sent the Nasdaq composite lower as a possible bidding war over data storage company 3PAR between Hewlett-Packard Co and Dell Inc sent shares of HP 2 percent lower. The bid comes on the heels of other deals last week,
including acquisition offers from Intel Corp and BHP Billiton and had pushed indexes higher at the
session’s open. Analysts said the recent spate of M&A also points to companies continuing to make profits through cost cutting rather than through revenue growth and highlights the economy’s
weakness. Mergers also typically lead to job cuts, casting another shadow over an already weak labor market.

The Dow Jones industrial average slipped 39.21 points, or 0.38 percent, to 10,174.41.
The Standard & Poor’s 500 Index lost 4.33 points, or 0.40 percent, to 1,067.36.
The Nasdaq Composite Index fell 20.13 points, or 0.92 percent, to 2,159.63.

Composite volume on the New York Stock Exchange, the American Stock Exchange and Nasdaq was one of the lightest of the year at about 6.13 billion as investors stayed to the sidelines and others were away.
The S&P 500 also broke through a support level of 1,170 after holding up earlier in the day. The level had formed a floor for the index of late and represents the 50 percent retracement of the most recent rally from July 1 to August 9.
The Nasdaq fared worse than the other two indexes, extending losses late in the day as technology shares slipped. Lingering concerns about the stalling economic recovery weighed on tech. The Dow and S&P 500 have notched two straight weeks of losses on gloominess over softer-than-expected data in recent days. Investors will get more data this week, with July existing-home sales due on Tuesday and the government’s revised reading for gross domestic product due on Friday.

European Markets
European shares rose on Monday from the previous session’s one-month low, boosted by merger and acquisition news and on gains in the mining sector on industry hopes a planned Australian mining tax could be scrapped.
The pan-European FTSEurofirst 300 index of top shares closed 0.7 percent higher at 1,036.51 points after hitting a one-month closing low in the previous session on concerns about global economic growth
The Euro STOXX 50, the euro zone’s blue-chip index, rose 0.6 percent to 2,660.84 points. The index faced strong resistance at around 2,670 – its 38.2 percent Fibonacci retracement of a fall from a high in April to a low in May — and further at around 2,698, its 50-day moving average.
Across Europe, the FTSE 100 index gained 0.8 percent, Germany’s DAX was up 0.1 percent and France’s CAC 40 was 0.8 percent higher.

Asian Markets
Asian stocks fell on Tuesday, with Japan’s Nikkei index dipping below a key support level as investors fretted about an anaemic global recovery, while the euro hit a six-week low against the dollar. Recent data, particularly those from the United States and Europe, have showed signs of fatigue of the global economy despite the extension of accommodative policy measures in most countries, prompting investors to shun riskier assets. The MSCI index of Asia Pacific stocks outside Japan fell more than 0.5 percent, tracking a weak Wall Street. Japan’s Nikkei average fell below the closely watched 9,000 mark for the first time in 15 months, pressured by selling by hedge funds and foreigners as concern mounted over the fragile economic recovery. The Nikkei index has shed nearly 15 percent so far this year, compared to a 2.6 percent fall in the MSCI Asia ex-Japan index. The 9,000-9,100 range had been strong support for the benchmark Nikkei since last year. Investors have dumped Japanese stocks in recent weeks amid worries about Japan’s economic recovery, heightened by the yen’s climb this month to a 15-year high against the dollar. Overnight, both the Dow Jones industrial average and the Standard & Poor’s 500 Index finished lower despite flurry of corporate takeover activity, usually a sign of investors optimism.

Here’s a very quick recap of the key events and likely market movers of the prior and coming 2 weeks. For full details see:

The Week Ahead: Stocks, Commodities, Forex Key 5 Market Drivers August 23rd – 27th and August 23rd – 27th Quick Review/Preview: Stocks, Commodities, Forex

Stocks: Normal Correction Or Next Leg Down?

The bellwether S&P 500’s technical breakdown continues, as the 200 day SMA (purple line) and 1100 resistance holds firm. Graham Summers has a good article here on how this indicates the market may have run out of buyers, meaning more downside ahead.

S&P 500 DAILY CHART COURTESY AVAFX MT4    13AUG23OFC

-Its downtrend picks up momentum, records its second pair of lower highs and lower lows in the past 2 weeks, 20 day SMA (yellow line descending line) crosses below its 50 day SMA (red descending line).

-The August drop confirms 3 bearish chart patterns:

–the long term downtrend that began in October 2007

–the bearish Head-and-Shoulders pattern that began in January 2010 [note the horizontal red line marks the approximate level of the 2 ‘shoulders’ of January 2010]

–the bearish Double-Top that from June 2010 [the horizontal red line also indicates the level of the 2 tops]

The big fundamental drivers reflected in this  world-wide breakdown in risk assets: deteriorating US jobs, housing, spending (the pillars of US GDP) and the expected slowing in the EU, UK, Japan, and China.

The biggest danger is that another global slowdown will doom EU austerity plans, bring the EU sovereign debt/banking crisis back to full fury and threaten international banking, another market collapse, and test of 2009 lows.

US Bonds: Continuing Rise

This suggests rising fear and thus more downside coming for equities, as bond markets tend to lead stocks.

Commodities: Energy Down, Gold Up, Softs Up

Oil

Crude prices, which typically track stocks and often exaggerate their movements,  deteriorated badly, as WTI falls nearly 3% as global demand was revised lower and US inventories  reached record levels of refined products.

Crude prices failed hold above key support of $75 after on deteriorating US jobs EU growth picture

Gold

Up for a third straight week on concern about the Euro, fueled by new Irish bank bailouts and a report that Greek austerity is crippling growth to the extent that further aid may be in jeopardy because Greece may fail to meet certain debt/GDP criteria.  

Settling at 1228.8, about 3% from its all time high, appears on track to test its record high of 1266.5.

Holiday buying in India may add demand.

Softs

Agricultural commodities remain in an overall steady uptrend on a weekly basis

Forex

Clear bias over the past weeks to the safe haven JPY, CHF, and USD, in that order, as poor US economic fundamentals and new stimulus keep the USD the least preferred of the safe havens. The EUR is resuming its downtrend that began in December 2009.

Potential Market Movers To Watch For The Coming Weeks 

The Most Important Calendar Events Include:

• A wave of revised Q2 GDP figures from the US, Germany, and UK. If the German report undermines expectations of continued robust German growth, an already nervous mark, the EU sovereign debt and banking crisis could return to spring panic levels.

That remains the prime danger – another global slowdown that dooms EU austerity plans to failure, brings spiking borrowing costs and risk of imminent default by one or more nations, and threatens international banking liquidity and another market collapse.

• Watch PIIGS nations’ sovereign CDS spreads. If they begin to ease the EUR/USD could attempt a bounce to around 1.3000.  If they continue widening, then we’re approaching another bout of EU crisis and lots more downside ahead.  

• Big US bond auction of $109 billion supply of coupon-bearing debt also worth watching, though more as a sign of how strong risk aversion has become rather than for signs of lack of demand (despite China’s supposed heightened interest in EU bonds).

• Other Key Events: The week of August 29^th – September 3^rd is the typical packed monthly US jobs reports week. Chicago PMI will clarify if US manufacturing is really slowing, as was suggested by the recent Philly Fed report.  A rising trend of weekly first time claims suggests another dour jobs report

• Continued ECRI Weekly Leading Index below -10 will suggest a double dip recession coming

 Wildcards To Watch For- Likely Sources of Surprises

• Poor EU sovereign bond auctions or signs of trouble with interbank lending
• Disappointing China data 

Disclosure: No Positions