Tuesday 19 July 2011
Friday 8 July 2011
Can’t get much worse than the June jobs report
The second quarter was never going to go down as one of a strengthening US recovery but the June jobs report really rubs salt in the wounds with just 18k added to June payrolls vs. market median estimates of +105k which compares to the 120k+ needed to keep the unemployment rate steady (up 0.1% to 9.2% today). This looks even worse when factoring in downward revisions to May and April leaving a net figure of -26k. Hourly earnings were also flat m/m (mkt +0.2%) while hours worked slipped too (34.3 from 34.4). The expected H2 upswing can’t come soon enough.No surprise to see markets react negatively, the dollar and UST’s both gaining ground as risk was cut from books with the break in the 10-year in particular looking significant. It certainly shuts off higher targets towards 3.40%. Bulls in fact should be now talking up a move back towards 2.85%/2.87% now. We’re inclined to take a more constructive view on equities with the recent run up leaving quite a bit of profit on the table for the bulls which can be booked. Technically a short-term dip back towards 1,314/17 in the S&P500 (ES1) looks feasible but we’d expect to see real money begin accumulating again in this band.
While recent data has been bad we think this should be pretty close to the trough, or at least expectations should readjust which in turn would give less bad figures at least some degree of positive shine. Citigroup’s economic surprises index (measuring outcomes vs. economists’ estimates) provides some supporting evidence of this too.
Thursday 7 July 2011
Pound trading peseta like as ECB meet highlights rate differentials
The ECB reaffirmed its inflation fighting credentials, raising rates a further 25bps to 1.50% at its July meeting, as we expected. Governor Trichet’s term may be drawing to a close (November) but there was no sign of any mellowing in his tone, reminding at this afternoon’s press confernece that monetary policy is still accommodative and hinting that further tightening was needed despite the economic risks surrounding the seemingly never ending peripheral debt crisis. There was at least one concession, the announcement that the ECB would suspend its minimum credit rating threshold for Portuguese bonds until further notice, citing recent fiscal steps. But there was little real slack for governments hoping for any substantial monetary tonic. The suggestion of higher rates was enough to tempt money back into the EUR, though the Euribor strip was little changed on the day suggesting FX traders might have got ahead of themselves. Overall the EUR/USD picture is modestly bullish, we’d expect most will look to continue plying the range here, which on our chart looks set at 1.4160 – 1.4590 for the moment.
This backdrop couldn’t contrast more starkly with the fortunes of the pound with the BoE holding rates again. There is little prospect of a hike this side of 2012 and given the patchy nature of the economic recovery even then the MPC is unlikely to be in that much of a hurry having sat through the current CPI hump. Sterling has already suffered on the back of the increasing spread between UK and Eurozone rates with EUR/GBP hitting 0.90 again. £8.00 cups of coffee (we won’t even contemplate what a beer costs) on the Cote d’Azur might be enough to persuade continental holiday makers EUR/GBP shorts are the way to go but it’s unlikely the pound will see anything but a short-term reprieve without a marked improvement in macro data.
2-year swap spreads suggest that there isn’t any floor under sterling; in fact the risk seems to be skewed to further weakness in trade weighted terms. Of the major crosses GBP/USD looks the more interesting prospect technically. The tone here is decidedly bearish sub 1.6140/60, in fact sub 1.6300 where TL and some of the more important longer-term moving averages are packed. The first downside objective is to crack the recent intra-day lows at 1.5911/14, a stone throw away now. Through there a run towards the 38.2% Fib line (1.5789) would be the aim. This needs to hold to avoid a deeper move back into the 1.5500 congestion zone and the Sep/Dec lows around 1.5350.
Wednesday 6 July 2011
Profit taking shouldn’t derail S&P500 bulls
News flow weighing on the equity market mood on Wednesday with not only Moody’s decision to slash Portugal’s debt rating into junk territory last night but also another rate hike from the PBOC rekindling China slowdown fears encouraging profit taking. The e-mini S&P (ES1) futures have ticked down close to 7pts since the close as a consequence, hitting the 1,330.00 marker thus far, a touch above the first intra-day support level at 1,328.00. A crack here should see the faster money look to take the pair down in the direction of the more important 1,319.00/1,313.00 zone where there is some further intra-day support protecting the 100 and 55-DMA’s at the lower end of this band. Our daily indicators suggest the market is by no means overbought however, let alone signalling a more meaningful top is in place, so our preference for buying weakness remains. As we noted last week bulls shouldn’t be too ruffled whilst the market holds above 1,301 and we’d be surprised if the market can slide as far as that this week.
Tuesday 5 July 2011
EUR/JPY at the top of the range, shorts tempting
EUR/JPY has had a modest pullback after the late June rally stalled at 117.80 resistance. The range traders should be encouraged by this with the base of the recent trading range down at 113.50/114.09 (200-DMA) compared to current levels around 116.96, which is pretty close to a three to one risk reward ratio for a short. While there aren’t any particularly compelling sell signals popping up on our daily indicators yet the hourly charts do hint at downside pressure.
On the fundamental side the Japanese are obviously keen to see a weaker but JPY intervention prospects look rather slim currently. We’d probably need to see USD/JPY to make a decent run through 80.00 to prompt further BoJ buying. Equity gains are probably the greater risk for EUR/JPY bears, keeping pressure on the principle funding currencies (JPY/USD/GBP) where the policy stances are markedly divergent from the ECB’s. While we’re bullish equities on a multi week time frame after the strong gains of last week some consolidation wouldn’t be surprising which in turn would allow the EUR to drift lower in the short-term. Eurozone debt problems are rarely off the front pages too, underlined by this evening’s decision to cut Portugal’s debt rating to junk (Ba2) which ought to counter another (probable) ECB rate hike on Thursday.
Against this backdrop any run back towards EUR/JPY117.20 should be viewed opportunistically, working a stop on a close above 117.80. Shorts should add if 115.80/90 falls with a 114.30 target.
Friday 1 July 2011
QE2 finale, rallying stocks dull UST allure
On the Treasury’s side the improving risk back drop not to mention the market hitting the milestone that is the official end of QE2 has been more than enough to keep sellers in the ascendancy. The 10yr chart looks very bullish (from a yield perspective). A clear break of 3.21% (38.2% Fib level) would leave 3.40/43% as the most viable short-term target, so 18-20bps of upside. Bond shorts should be able to hold out north of 3.10%, a swing through here would suggest we’ve found a top or are at least going to move into a range trade and see some squaring. Treasury bears should be reluctant to chase yields once higher levels are hit though (north of 3.40%) with the inflation outlook far from threatening and the Fed set to remain a good buyer as it looks to reinvest maturing paper/coupons it holds on its balance sheet not to mention what remains a steep yield curve.
S&P sees a week of gains as bulls cement control
US data has started to look a little better over the past week, at least from the activity side, with better than expected May durable goods orders (0.4% over mkt estimates @ 1.9%), a strong Jun Chicago PMI (61.1 vs. 54.0 median) and Milwaukee NAPM (59.3, mkt 59.0) while June ISM manufacturing also showed a solid pick-up (55.3 vs. 52.0 consensus). Confidence survey’s appear a little more fragile but we’d expect these will follow suit over the summer.
The stock market reaction to Friday’s ISM numbers suggests the market also buys into this ethos at the moment with the S&P, already through the 1,315 area which was our first objective, jumping towards 1,325. Bulls should be able to hold the market above 1,301 now and only sub 1,293 would shorts begin to look viable again. The aim is to drive the market towards 1,347.5 where the June reversal began and from here, after some consolidation, mount a push through 1,400. We’d note that even after the recent bounce the market is not overbought. Buying weakness should be the specs game.
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