Caution of Further Weakness in Indices and AUD crosses
15/11/10 08:01
Precious metals sold off sharply on Friday after the
accelerating uptrend of the past few weeks had
already lost some momentum on Thursday. The more
cyclical and risk sensitive silver and palladium
markets were most affected and lost 5%+. The two main
factors behind the sell off were 1) there have been
strong investment inflows during the run up to Gold
1400 and Silver 30USD funds are taking profit, 2) US
bond yields have increased over the last few days and
there are mounting concerns that China might hike
rates. We have been watching the US Yields and USD
correlations in Pro Traders Club as yield spreads
support USD. In my view, US bond yields have been a
key driver behind the latest metals rally, so the
market is now reacting very sensitively to current
interest rate movements, which helps us discern
positions (more in Pro Traders Club).
We are seeing technical signs of weakness in DAX, CAC40, S&P and DJIA and are positioned for further weakness in the major indices.
The number of Pro Traders Club members that have become full time traders is continuing to increase. We will have more guest speakers in the near future. Don't forget to check out our workshop page for London, Ft Lauderdale and Singapore events.
FX markets tred water during the Asia session as investors looked to the opening of the Eurozone sovereign debt markets to provide some direction. Speculation continues in the press that a bailout of Ireland could come as soon as this week, although Irish government officials have strenuously denied this, and IMF Managing Director Strauss-Kahn also dismissed the suggestions. The S&P500 finished down -1.2% on Friday, after global equities succumbed to the general risk-off mood. UBS economists note that the rise reflected improvement in both current conditions and expectations. Long-term inflation expectations in the survey were unchanged at 2.8% - right in the middle of their longer-term range. The New York Fed began its first purchases of US Treasury securities under the Fed's latest round of quantitative easing. Richmond Fed President Lacker said it is "unfair" to claim that the Fed's decision to return to quantitative easing was designed to weaken the dollar and, of course, we doubt the thought crossed their mind.
We are seeing technical signs of weakness in DAX, CAC40, S&P and DJIA and are positioned for further weakness in the major indices.
The number of Pro Traders Club members that have become full time traders is continuing to increase. We will have more guest speakers in the near future. Don't forget to check out our workshop page for London, Ft Lauderdale and Singapore events.
FX markets tred water during the Asia session as investors looked to the opening of the Eurozone sovereign debt markets to provide some direction. Speculation continues in the press that a bailout of Ireland could come as soon as this week, although Irish government officials have strenuously denied this, and IMF Managing Director Strauss-Kahn also dismissed the suggestions. The S&P500 finished down -1.2% on Friday, after global equities succumbed to the general risk-off mood. UBS economists note that the rise reflected improvement in both current conditions and expectations. Long-term inflation expectations in the survey were unchanged at 2.8% - right in the middle of their longer-term range. The New York Fed began its first purchases of US Treasury securities under the Fed's latest round of quantitative easing. Richmond Fed President Lacker said it is "unfair" to claim that the Fed's decision to return to quantitative easing was designed to weaken the dollar and, of course, we doubt the thought crossed their mind.
Eurozone sovereign risk is again on the rise. This time Ireland is the focal point, though concerns are spreading to Portugal as well. The fear is that banking losses will swell Ireland's debt burden at a time when the political resolve to impose austerity is coming into question, and when the EU may take a tougher stand on sovereign risk. In a review of developments from our heads of currency, equity, rates, credit and EM strategy, we see the euro as the biggest potential loser.
Although the spread of Irish and Portuguese sovereign bonds over bunds tightened significantly on Friday, concern over Eurozone sovereign risk continues to be a focal point for financial markets. Several Irish lawmakers, including Prime Minister Cowen and Finance Minister Lenihan, dismissed speculation that a bailout package for Ireland was being prepared. Justice Minister Ahern described the bailout talk as "fiction". IMF Managing Director Strauss-Kahn said "so far I have not had a request, and I think Ireland can manage well".
EU, IMF and ECB officials are scheduled to begin a visit to Greece today to assess progress on fiscal matters. If satisfactory, Greece could receive a further €9 bn in cash as part of the bailout plan agreed in May. Greece's Prime Minister Papandreou said the term over which Greece repays the bailout loan may be extended.
On Friday, German GDP growth slowed to +0.7% q/q for Q3, broadly in line with consensus, thanks in part to the uncertain global outlook and the stronger euro. However, the recovery remains on a stable footing and the outlook for Europe's largest economy is far superior to that of its peers. The Eurozone growth reading was also down slightly, falling to +0.4% q/q compared to +1% q/q for the previous quarter..
JPY GDP for Q3 came in much stronger than expected at +0.9% (cons. 0.6%), and +3.9% y/y (cons. 2.5%). Despite the positive surprise, Economy Minister Kaieda offered a sombre assessment, saying the Q3 GDP expansion was due to a temporary rise in consumption, and that the Japanese economy is still at a standstill. He added that the yen's rise may weigh on the economy further.
JPY has seen weakness this pas week with no signs selling pressure, rather pullbacks occurring on an ease of bids while no change in offers.
AUDJPY remains our favorite pair and we view 80-81.50 area as good buying opportunities for intra-day and long term positions. However, we do see risk in commodities and equities correction will also weigh on this pair and present good entry opportunities for longer term. We are following this pair closely in Pro Traders Club as we share the specific features of this trading strategy. Stay posted for a complete FX course on trading the AUDJPY pair.
Chris Lori
CTA