Quick Preview: Stocks, Commodities, Forex

    Weekly market preview contributed by AVA FX

 1. EU Debt Crisis-nothing has changed-risks to watch

            a. Further news on Hungary, other new sovereign debt skeletons popping out of the closet:

                     i.      Donor nations: for example-legal challenges to German participation

                     ii.      Debtor nations: new problems for PHIIGS, or new contagion threats like  Romania or Bulgaria

      b. Government stability: threats to stability of any major debtor/donor administration

      c.Progress in deficit cutting, especially

         i.      Political and labor opposition

         ii.      GDP and employment slowdowns from deficit cutting

      d. Bank stability

2. Wildcards: Watch for updates on

     a. China construction and housing data              

     b. US: pre-earnings announcements banking scandals, housing market and affects on bank finances, BP oil spill

3. Economic Events: No data of first-tier importance. BoJ and SNB may offer remarks of note. For the US, CPI is the major event, TIC and housing data may have impact too

STOCKS

S&P 500 +2.5%, DJIA +2.8%, NASDAQ +1.1%

In sum, nothing has changed since last week to alter our near term bearish view of risk assets. The market was due for a technical bounce, its first positive weekly close since April 23^rd, and the absence of bad news out of the EU for the first week in recent memory plus some positive data noted above made this possible.

Fundamentals for risk assets noted in the above outline remain mostly bearish, though as noted in The Week Ahead: Stocks, Commodities, Forex – 3 Key Market Drivers June 14th- 18th, last week had some positive news for risk appetite.

As the chart below shows, the bellwether S&P 500 remains firmly in a downtrend, within its past months’ trading range, and has yet to break through any kind of major resistance on its daily chart.

 

S&P 500 Daily Chart: Firm downtrend, multiple near term resistance levels   02jun13

Note in particular that:

-          Its death cross (50 day moving average below 200 day m.a.) is widening

-          The zone around 1100 offers quadrupled-layered resistance immediately ahead:

• The psychologically important 1100 price level itself
• The 20 day moving average (red)
• The 200 day m.a. (gold)
• The  50 day m.a. just above these, around 1130

 

Watch these resistance points carefully.

Otherwise, the big picture implications remain unchanged, and we remain bearish on risk assets, selling on strength, buying on weakness. See The Week Ahead: Stocks, Commodities, Forex – 3 Key Market Drivers June 14th- 18th for details.

COMMODITIES

 

Crude Oil

Moving with overall risk sentiment. Sank below $70 early in the week in response to concerns about Hungary’s default risk, then followed stocks higher on positive economic news and comments about growth prospects for the US, EZ, and New Zealand by their respective central bank heads.

We continue to monitor the regulatory ramifications of the BP oil spill. As expected, the US Dept. of Interior imposed stricter regulations to prevent a similar incident, and has suspended granting of additional off-shore drilling permits. In the end the US will have little choice but to allow drilling for its longer term energy needs, but the uncertainty is over how long the ban will hold and what kinds of costs the new regulations will impose.

Gold

Because it is neither risk nor safety asset, but rather a currency hedge, gold rises when there is concern about a major currency. During most of 2009 that meant gold moved mostly with concerns about the USD. Since Greece’s solvency metastasized into the EU debt crisis, gold has been moving in the opposite direction of the Euro. Thus it opened strongly this week on concerns about Hungary’s solvency, then fell after hitting new all time highs as

• These worries eased
• Risk appetite and the Euro rose, encouraging gold longs to take profits and / or use proceeds to close out short Euro positions

 

For the coming weeks, expect gold to continue its strong inverse correlation to the Euro as long as the EU debt crisis continues to cast doubt on the long term value of the Euro.

As noted above in the STOCKS section, we remain bearish on risk assets, meaning all commodities except gold and silver.

 

Source: oilngold.com  05jun13

FOREX

 

As noted above in the STOCKS section, we remain bearish on risk assets, including the risk currencies and any JPY crosses, and most USD and CHF crosses. The CHF has shown particular strength as SNB has backed off intervention for now, and is allowing the CHF to make up gains appropriate for the #3 ranked safety currency in a risk averse market.

Like all markets, forex is awaiting the next major market moving event. The economic calendar this week is relatively light, so the next likely market mover will be from one of the 2 key types of market moving events noted at the top: those related to either

• The EU debt crisis
• One of the wildcards

 

USD Weekly Outlook: Could fall near term but longer term prospects bullish as long as EU debt crisis remains essentially unresolved

 

USD Bias: this week neutral/bearish, longer term bullish

• Key events this week: CPI data could help the USD as inflationary pressure is the only motivator for the Fed to tighten while jobs and spending remain weak and cause traders to price in a mere 37 bps of interest rate increase in the coming year (vs. over 150 for the CAD).
• Watch the US Dollar Index as key 5 year-old trend line resistance was tested this week at 88.50, but has held for the time being.
• S&P 500 very close to major resistance levels, suggest risk asset rally to end soon unless there is a new bullish market moving event. If not, the safe-haven USD will likely hold or go higher.
• USD’s underlying economic fundamentals better than those of the EUR, JPY, and GBP
• Retail sales less disappointing than initially thought: if remove the 9.3% drop in building materials and gasoline, due in no small part to price decreases rather than fewer purchases, the result is close to expectations
• EURUSD at 1.2113, just below its  historical midpoint of 1.2130 that was strong  support, now resistance
• Unless the pair can get back above it soon breech from such a prominent pair could translate into an FX-wide move for the dollar.

 

EUR Weekly Outlook: No negative news plus mildly supportive data gives it fuel for an oversold bounce

 

EUR Bias: near term neutral/bullish, could still see some bounce to retest 1.2130 historical midpoint of EURUSD range, longer term bearish, fundamentals, technical factors remain in place

• Acceptable demand for Spanish and Portuguese bonds, albeit at higher rates, helps ease concerns about these countries for now. Spain’s 3 year bonds sold with an average yield of 3.317% vs. 2.007% in April. That is an increase of over 50% and one which few countries could handle in the long term, but at least it means these countries can continue to access debt markets without EU assistance
• EUR/USD has critical resistance in the 1.2150/1.2200 area, and the 1.1800/50 area is critical support.
• Positive data from Germany, supportive remarks from China, Trichet provide some short term support, but longer term, the EU’s high debt levels and austerity plans remain. Much of this may already be priced in
• Like any short term oversold asset, the EUR is prone to bounce on even mildly positive news
• Until there is clarity over who is exposed to whom, the Euro is likely to head lower, and sharply lower when there are new negative surprises like Hungary (or Bulgaria or Romania?)
• If EURUSD can return to being above the historic midpoint 1.1230, technical damage can be minimized, would likely signal near term bottoming for EUR barring new negative surprises (which not unlikely)
• As long as no major negative surprises, following risk appetite, but S&P 500, at 1091, sits just below heavy resistance at the 1100 level (see STOCKS above), suggests risk rally is vulnerable, and thus the EUR, to pullback
• Longer term, the EUR’s best hope for a longer term reversal is some kind of major trouble for the USD. The US housing market could once again become a threat to America’s banks, similar in effect to PHIIGS sovereign debt crisis

 

GBP Weekly Outlook: Modest recovery continues

 

GBP Bias: short term neutral / bullish, longer term bearish as spending cuts slow growth, keep BoE dovish

• Big event week: consumer prices on Tuesday, followed by the employment report on Wednesday and retail sales on Thursday, rising CPI likely to push GBP higher as it raises rate increase expectations
• 5.7%PPI lower than prior month but still high
• NIESR GDP estimate few 0.6%, the 7^th consecutive monthly increase
• Industrial production falls 0.4%, but that is after the biggest increase since July 2002, so a relative decline from that lofty level was likely
• Emergency austerity budget deadline of June 22 approaches, coming spending cuts suggest BoE will stay dovish, which is a long term negative for the Pound

 

JPY Weekly Outlook: Will expected BoJ stimulus pressure JPY enough to reverse its uptrend?

 

JPY Bias: bearish barring a new negative surprise to feed more risk aversion

• BoJ expected to add new stimulus, could send JPY lower unless risk aversion continues
• New PM Kan known for JPY dovishness, a long-term negative for the Yen
• S&P 500 daily chart suggests risk asset rally to faces tough resistance, which would help the JPY

 

CHF Weekly Outlook: Has potential to rise on risk aversion as SNB backs down

 

Bias: Neutral

• CHF could make up lost ground during the past month’s risk aversion rally now that SNB appears to be letting it rise
• SNB threat will be back, low liquidity days are the most likely time for SNB intervention

 

CAD Weekly Outlook: Interest rate increase expectations provide support , but following risk sentiment

 

CAD Bias: Bullish/Neutral

• About 150 basis points of rate hike priced in over the coming 12 months, making it a big mover on risk appetite days, and resistant to declines on risk aversion days
• Still primarily following oil, stocks – so keep an eye on these

 

AUD Weekly Outlook: Moving with risk sentiment, China outlook

 

AUD bias: short term bullish neutral

Likely to be among the top performers if risk rally continues

Continued strong jobs data

Next key resistance at $0.8500

Higher Chinese inflation suggests more Chinese attempts to cool Chinese economy, bearish for all commodity dollars

NZD Weekly Outlook: Moving with risk appetite, but RBNZ hawkishness suggest relative strength ahead

 

NZD Bias: Neutral as markets await next big hint about recovery or next nasty surprise from the EU

RBNZ raises rates, mildly hawkish tone suggests more on the way barring double dip recession or deep China slowdown

Conclusion

We are not believers in any risk rally until the S&P 500 can break past the 1100 level and its quadruple layered resistance, especially with the full array of bearish forces lurking in the background.

Disclosure: No Positions

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