Sunday, 27 October 2013

Trading Places - Excel Markets Week Review and Preview

Ralph Shell, Excel Analyst

The end of the partial US government shutdown allowed the 15% of the non essential Department of Labor employees go back to work.  Once there, they produced the belated NFP report; the numbers were a disappointment: only 148K new jobs were created, less than the estimate of 180K. 

Traders' reactions to the NFP number and the end of the shutdown were the same.  The US economy was harmed by the first event, and the NFP merely confirmed weakness in the US economy. 

The preferred treatment for the economic malaise under the Bernanke Fed is more QE, a blessing for the money managers.  Bad US economic news is now welcomed by those with access to QE funds, so for them the bad news is good news, and some of the markets respond accordingly.  Some analyst have even said the economic rebound in the US is so poor that the Fed will need their monthly bond purchases increased from the current $85B.

Friday's US news was confined to a consumer sentiment report and a report on durable goods.  With about 50% of the US adult population dependent on some type of government handout, the sentiment report took a dip to the lowest level of 2013.  The durable goods number is a leading indicator.  However, this month's number was distorted, with Boeing receiving an order for 127 planes, far more than the average month.  Remove the plane order and durable goods were slightly negative for the month.

Starting on Monday October 28th, there are some meaningful US numbers.

We begin with US pending home sales, expected to be down 0.2% but better than the negative 1.6% last month.  We continue Tuesday with the US PPI, expected to be 0.2% higher.  This is followed by retail sales, expected to be flat, and the retail sales, excluding autos, expected to be up 0.4%.  We then get the US Consumer Confidence number forecast to be 75.

Wednesday is the day for the ADP Employment Change, estimated to be 150K, and the US Core CPI, expected to be up 0.2%.  The initial jobless claims number, estimated to be 349K comes on Thursday.  Finally, on Friday we get the US ISM Manufacturing number estimated to be 55.

We need to remember the way these numbers have been trading; poor numbers are bearish the USD because it means more QE and a larger money supply.

EURO

While the US is, by their purchase of bonds, expanding the money supply, it appears Europe is going the other way.  Friday last, the EU M3 number was released.  This measures the broadest amount of the money supply.  The forecast was for growth of 2.4%, but fell short at only 2.1%.

This shows the EU money supply, partially because of  slow business lending, may well be a problem for an orderly Euro business recovery.  Either the business demand for loans has been slow because of a poor business climate, or banks are hampered with massive amounts of sovereign debt and non-performing loans, unable to make private sector loans.

Click to Enlarge EURUSD Daily Currency Chart

The German business climate on a M/M basis was 107.4 down from 107.7 last month.  This is negative but not enough to stop the euro's bull run.

There are additional euro numbers during the balance of the week, but most are of a medium impact variety. 

Click to Enlarge EURUSD Weekly Currency Chart

On Wednesday, we get the German unemployment rate, expected to be 6.9%, unchanged, then the total EU zone unemployment on Thursday.  This number is expected to remain at 12%, unless they can drop the count of people remaining in the work force as the US Dept. of Labor does.

Another report to watch in Europe is the CPI - this is projected to be up only 1% for the year. 


The big risk for the European economy may be deflation.  The Bundesbank, intent on fighting inflation from the last century, seems to be inhibiting monetary growth.  Already deflation has struck in Italy.  As the third largest issuer of government debt in the world, Italy cannot survive with deflation and no growth, and they are too big to be bailed out.

Currency trends usually continue until nearly the last bear turns bullish.  We may not be there yet, but looming in the future are serious EU/euro problems.

YEN

The Japanese yen has gained strength against the USD, but I suspect much of this might be USD selling.  On Sunday, the Japanese reported their trade balance continued negative.  No surprise here since they are now big energy importers.  On Monday, there will be some reports on household spending and the retail trade which should provide some guidance.

Click to Enlarge USDJPY Daily Currency Chart

There may have been some buying in the yen, a consequence of tightening monetary policies in China.  Recently, trade in the yen futures has contracted and the total futures open interest is now less than that in the pound.  Technically, the yen chart has been becoming compressed into a pennant.  Markets usually break out of such a formation with energy.  Currently, it is closer to breaking out on the down side.

Click to Enlarge USDJPY Weekly Currency Chart


BRITISH POUND

The pound has been on a roll - about a 1450 pip run up since the low made in early July.  During much of this rally, the specs were short.  During the period, there was gradual but persistent growth in the British economic reports, to the chagrin of the specs and the IMF who had forecast lower British growth.

The UK GDP report, released Friday, confirmed the better-than-expected GDP growth.  For the quarter, it was up 0.8% and 1.5% on the year.

Click to Enlarge GBPUSD Weekly Forex Chart

On Tuesday there is a report on the amount of Personal Loans Secured on Dwellings.  Though not of major significance, it may provide information about the governments stimulating programs in the real estate markets.  The critics claim this is a government bubble-in-the-making that needs to be watched.

AUSTRALIAN DOLLAR

It is interesting to note interest in the British pound futures has, since the 1st of September, grown substantially, while trade in the Australian Dollar has diminished.  At the end of August the futures open interest in the A$ was 189K compared to only 151K for the pound.  Now the open interest in the pound, at 186K far exceeds the OI in the A$ at only 128K.

The COT report for September 3rd, reflected specs were big shorts in both the pound, 50K and the A$, 90K.  Due to the government shut down, the most recent COT report is only through October the 1st.  This report shows specs had flipped their position in the pound to a small long, 9.6K.

Click to Enlarge AUDUSD Daily Forex Chart

In the A$, specs remained short, just a bit under 33K.  We suspect a current COT report will show a further reduction in the A$ short, and an increase in pound long.

In the forthcoming week, the most important reports for the Australian dollar will come from China, not Australia.

During the past week, there were reports the Chinese were draining liquidity, and trying to keep a real estate market from bubbling over.  On Thursday there are two Chinese PMI reports due.  Both numbers have been only marginally above the break-even 50 number.  Smaller numbers would hurt the A$.

We are headed for an interesting week.  Many traders will be watching the USD to see if the bearish trend will continue.  How will the markets respond to the week's incoming data?
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