StartOptions.com Market Weekly Outlook – January 25-29
A busy week is ahead of us: rate decision in the US, Japan and New Zealand and GDP releases from the US, UK and Canada are part of an eventful week. Will we see more dollar strength? Here’s an outlook for the last week of January.
Beginning on Wednesday, the World Economic Forum meets in Davos, Switzerland. In their 4-day annual meetings, many central bankers, senior politicians and business leaders from all over the world chit-chat with reporters and also make official and moving statements. Their sporadic comments can shake the markets during most of the week.
Monday, January 25th: Australian PPI provides a strong start to the week, as this is a quarterly figure that has a strong impact on the Aussie.
American Existing Home Sales are expected to post a big drop after two strong months, and fall to 6.04 million.
Tuesday, January 26th: The Bank of Japan makes a rate decision. While the Overnight Call Rate isn’t expected to move from 0.1%, but the Monetary Policy Statement could sure shake the Yen, especially if economic forecasts are changed.
German Ifo Business Climate is an important survey for the Euro. It’s expected to continue the steady rising trend and edge up to 95.3 points. Last week’s survey, from ZEW, was bad and sent the Euro down.
Britain probably finished the recession. Prelim GDP for Q1 is expected to show growth of 0.4%. The unofficial number from NIESR talked about 0.3% growth, and they are usually correct, so there’s a good reason to be optimistic. Right after the release, Mervyn King will be speaking.
Last week King weighed on the Pound. A volatile time for the Pound.
In the US, the year-over-year S&P/CS Composite-20 HPI is expected to show a smaller drop in the prices of homes, 4.9%. The more important figure is the CB Consumer Confidence, that recovered from a big fall, and is now expected to climb to 53.7 points.
Wednesday, January 27th: Australian CPI is a quarterly release and has a strong impact on policymakers. After a modest rise of 0.1%, Q4 is expected to show a rise of 0.4%. A stronger rise is necessary to push the Aussie higher.
American New Home Sales are expected to recover from last month’s big fall, and rise to 372K. This will be a warmup for the big event.
Bern Bernanke is expected to leave the interest rate unchanged. The Federal Funds Rate will probably stay at a maximum level of 0.25%, and traders will focus on the usually confusing FOMC Statement. Last month, it took the market 6 hours to digest the statement, which seemed balanced at first. As they focused on the upside of the statement, cautious signs of recovery, the dollar rose. But the message sure was confusing.
Also in New Zealand we have a rate decision. The hot air came out of the balloon with low CPI in New Zealand and China’s tightening measures. So, the Official Cash Rate will probably remain unchanged at 2.5%. Hints for future policy will be provided in the RBNZ Rate Statement.
Thursday, January 28th: American Durable Goods Orders are expected to jump by 2.1% after remaining almost unchanged last month. Core Durable Goods Orders, no less important, are expected to do the opposite and rise by 0.4% after a leap last month.
Unemployment Claims that disappointed last week, are predicted to go back down to 452K.
In New Zealand, both Building Consents and Trade Balance will impact the kiwi, with the latter expected to show a smaller deficit this time.
Near the end of the day, Japan will be releasing Household Spending which is expected to rise and Tokyo Core CPI which is still expected to show an annual drop in prices – 1.8%.
Friday, January 29th: European Unemployment Rate is expected to be bad once again. After reaching 10% last month, it’s predicted to rise to 10.1%.
In Switzerland, the KOF Economic Barometer will move the Swissy.
Canada releases its monthly GDP, which is expected to show a 0.3% growth, better than the previous month. Last week’s rate decision hurt the loonie. USD/CAD will shake during this time, especially with the next release.
American Advance GDP for Q4 holds high expectations: an annual growth rate of 4.6%. After exiting recession in Q3 with a 2.2% growth rate, things are expected to get better in Q4. This release will shake the markets.
Chicago PMI is predicted to post a small drop, and the Revised UoM Consumer Sentiment is expected to be revised to the upside. Both events will be overshadowed by the Advance GDP release.
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Oil Rises Above $79 on Wall Street Gains
Oil prices rose more than 1 percent on Tuesday as gains in the U.S. stock market boosted prices, outweighing earlier pressure from mild weather and the stronger greenback.
U.S. light, sweet crude [CLC1 78.93 0.93 (+1.19%)] rose $1.02 to settle at $79.02 a barrel.
The New York Mercantile Exchange combined prices for Monday and Tuesday into a single trading session because of the Martin Luther King Day holiday.
London Brent crude [LCOC1 77.69 0.59 (+0.77%)] was also higher.
“I do think the S&P 500 is the market’s excuse for price recovery. Whether that establishes that the S&P trumps the stronger dollar and the direct fundamentals remains to be seen,” said Tim Evans, energy analyst at Citi Futures Perspective in New York.
Wall Street Tuesday boosted crude prices as investors bet that a Massachusetts Senate race could derail President Obama’s healthcare reform plan.
Opinion polls showed that Massachusetts voters may replace the late Senator Edward Kennedy with a Republican, taking away the Democrats’ 60-vote supermajority in the U.S. Senate.
The S&P Healthcare Index climbed 2.1 percent on Tuesday, with Humana [HUM 51.40 2.89 (+5.96%)] and pharmaceutical company shares leading gains.
Fundamentals Still Weigh
However, high oil inventories and weaker demand due to mild winter weather were still a factor for oil prices, analysts said.
U.S. heating fuel demand is expected to be well below normal this week, according to the National Weather Service.
The Organization of the Petroleum Exporting Countries (OPEC) said Tuesday that oil inventories are high enough to absorb any increase in winter fuel demand.
The group also cut its forecast for demand for its crude by 20,000 barrels per day to 28.59 million bpd in its monthly report, while leaving its forecast for world oil demand growth unchanged at 820,000 bpd.
Futures and Pre-Market
A stronger dollar may also add some pressure to oil prices, with the euro falling to a four-week low against the dollar.
A rise in the value of the dollar often discourages investor interest in dollar-denominated commodities such as oil.
Japan Airlines’ bankruptcy filing Tuesday may also have some impact on oil prices, some analysts said. The company said it would cut more than 15,000 jobs and unprofitable routes.
Week Ahead: Earnings Will Call the Tune for Stocks
Earnings will be a challenge for stocks in the coming week, as major bank and tech firms report, along with hundreds of other companies.
The question, though, is whether earnings news will be strong enough to keep the rally going or investors will see it as an excuse to take profits temporarily.
The latter was the case Friday, when tech giant Intel [INTC 20.80 -0.68 (-3.17%) ] fell after reporting better-than-expected profits and an improved outlook. JPMorgan Chase [JPM 43.68 -1.01 (-2.26%) ] stock also fell, and its report raised the flag on other bank stocks after loan losses and weaker-than-expected revenues outweighed a strong income number. Both stocks had moved higher ahead of their reports.
“We think the reaction is overdone. The issue for equity markets in earnings is really, about, in our view, the multiple,” said Binky Chadha, chief U.S. equities strategist at Deutsche Bank.
This earnings season is a critical turning point since it is the first quarter in 10 where there should be positive profit growth on a year-over-year basis. S&P 500 profits are expected to improve by 8 percent, excluding the financials, according to Thomson Reuters. When financials are included, that number jumps to 186 percent because of the sector’s gigantic losses a year ago.
For the most part, analysts expect the earnings news to be a catalyst for stocks in the first quarter. Some companies reporting in the week ahead include General Electric [GE 16.44 -0.26 (-1.56%) ], Citigroup [C 3.42 -0.09 (-2.56%) ], Goldman Sachs [GS 165.21 -3.32 (-1.97%) ], Bank of America [BAC 16.26 -0.56 (-3.33%)], Google [GOOG 580.00 -9.85 (-1.67%) ] and IBM [IBM 131.78 -0.53 (-0.4%) ].
“I think earnings will deliver more than expected. The news we have so far is positive, though the market is taking it badly,” he said. Chadha said other factors were worrying investors, including the concerns about Greece’s fiscal situation.
Whither Stocks
David Kotok, chairman and chief investment officer at Cumberland Advisors, said he sees earnings as a driver in the first quarter. “It’s a good earnings season. There’s no labor cost pressures,” he said. Companies are showing margin improvement as they reap the benefit of leaner work forces and reduced spending.
Kotok expects technology to do particularly well this quarter and he is overweight the sector. When Intel released profits, it also reported surprisingly strong margins of 65 percent, the best level in a decade. Margin improvement could be an important story for tech. “That could be sustainable worldwide for several years,” he said.
Banks are another story. “We won’t know sustainable trends for banks in the U.S. until 2011 or 2012,” he said, adding that at that point current prices could look extremely cheap.
Kotok said the market has had an easy run since it began moving higher in March, but the next leg up will be bumpier. “I think the second half is going to be troubled by the economy. I think the market’s going to recognize that and reprice and sell off in the late spring, early summer” he said.
Chadha disagrees, however, that markets will be troubled in the second half. “It’s clearly the consensus view that we have a good first quarter, first half and then things stagnate and get much worse. I basically don’t think that. The fundamentals are that basically corporates over contracted and they over fired, and there’s basically a very large gap between final sales and production. There’s room for them to expand. That will spark a self-sustaining recovery,” he said.
But, he said the economy is not self -sustaining yet, and that fact could make the market choppier in the first part of the year rather than the second half, if his premise is correct.
“We’re putting our money on that it will take hold and the market should do a lot better later,” he said. Currently, the market’s multiple is about 14 on 2010 earnings, and fair value would be closer to 16.5. “So that’s potential for 20 percent more upside,” he said. His year-end target is 1325 on the S&P 500.
Chadha’s year-end target is 1325 on the S&P 500. Kotok’s target for the S&P this year is 1250 to 1300.
The Dow in the past week lost 8 points or 0.08 per cent to 10,609, while the S&P 500 slid 0.8 percent to 1136. Financial shares lost 1.8 percent for the week, but the biggest losers were telecom, down nearly 4 percent and materials, off 3.2 percent. Health care was the best performer, up 1.5 percent, while consumer staples were second best, up 0.9 percent.
Credit Uncrunch
Treasuries gained in the past week, driving yields lower. The 10-year’s yield fell to 3.676 percent, and the 2-year slipped to 0.887 percent.
In the past week, the government’s auctions of $84 billion in notes and bonds were well received by the market. At the same time, the flood of corporate debt issuance continued, bringing the total of dollar denominated issuance to $56.7 billion since Jan. 1.
In the past week, spreads widened in emerging markets, as investors worried about Greece’s ability to make debt payments. But there was also widening in corporate spreads. Traders have been watching these spreads, particularly as Washington discusses a new tax for banks and some of the consumer driven data in the past week disappointed.
Kevin Ferry of Cronus Futures Management said the widening of corporate spreads is actually just a normal function of the market as it absorbs the new issuance. He and others say the heavy activity is in part being driven by corporations anxious to get deals done ahead of higher interest rates.
“What we’ve been focusing on for the past two years is very stable and in fact it’s at an all time low, but out in the real world getting this (corporate debt) stuff through the pipeline is having the usual effect,” he said. Ferry said, for example, the 12-month libor rate hit an all time low in the past week of 0.89 percent.
Dollar Dilemma
The dollar lost 0.2 percent against a basket of currencies but gained 0.3 percent against the euro to $1.4379. At the same time, commodities sold off. Oil had five days of losses, finishing Friday at $78 per barrel, a decline of 5.7 percent for the week. Gold lost $8.10 per troy ounce for the week, to $1130.10.
Boris Schlossberg of GFT Forex said the dollar and euro are trapped in a range around $1.45 per euro. “Every time we get positive data on one side of the Atlantic, its counterbalanced by bad news on the other side of the Atlantic,” he said. The market responded to comments in the past week from European Central Bank President Jean Claude Trichet about a possible negative quarter in the Eurozone, as well as worries about Greece.
One focus for the euro in the coming week will be PMI data for the Eurozone, released on Friday, Schlossberg said.
Econorama
In the U.S., the calendar for economic data is relatively light. Markets are closed Monday for the Martin Luther King holiday. Wednesday and Thursday are the big days for data. On Wednesday producer prices are reported, as are housing starts. Thursday’s data includes the Philadelphia Fed survey, leading indicators and weekly jobless claims.
The National Association of Home Builders survey is Tuesday, as is the Treasury’s international capital flow data.
In the past week, the data pointed to a still very weak consumer. Retail sales were surprisingly negative for December and consumer sentiment was weaker than expected.
“The reality setting in is this isn’t an easy recovery,” said Diane Swonk, chief economist at Mesirow Financial. Swonk said she expects unemployment to continue to rise and peak sometime this quarter at a level of 10.25 to 10.3 percent.
“We’ll still turn profits this year. We’ve still got productivity growth. This is still a good environment for profits and profit share, compared to wage share, is going to rise. That should support some additional gains in the stock market from where we were at the end of the year, but we’ve already gotten ahead of ourselves,” she said.
She said the housing starts data and PPI data this week should be important. She said PPI should be neutral and the housing numbers will be watched to see what impact there is from the first time home buyers program. “It’s really telling about how much government support is needed for this sector,” she said.
What Else to Watch
The Obama Administration’s plan to tax banks for TARP-related losses rattled investors in the past week and weighed on bank stocks when the news first trickled out. Investors have also been watching every development in Congress efforts to revamp health care.
Winterizing Your Portfolio – A CNBC Special Report
Now investors will be closely watching Massachusetts to see whether the Senate race there could be a sign that change is coming to Washington. On Tuesday, voters there will choose between Democrat Martha Coakley and Republican Scott Brown in what has become an unexpectedly close race to fill the seat of late Sen.. Ted Kennedy.
The race is being watched as a referendum on President Obama’s programs and a sign of what could happen in the mid term elections in November.
Earnings Central
Banks dominate the week, starting with Citigroup’s report Tuesday. Bank of America, Morgan Stanley, Bank of New York Mellon, State Street, US Bancorp, Wells Fargo and Northern Trust report Wednesday. Thursday’s reports include Goldman Sachs, Capital One Financial, American Express, Fifth Third, Keycorp, and PNC. Huntington Bancshares and SunTrust report Friday.
Among tech names this coming week, IBM leads the charge Tuesday. Ebay, Seagate and Xilinx report Wednesday. Google and AMD report Thursday.
Also Tuesday, reports are expected from TD Ameritrade, Forest Labs, and CSX. On Wednesday, AMR, Jefferies, Covidien, Coach, Brinker International, Starbucks, and SLM release results. Thursday’s reports include Burlington Northern Santa Fe, Continental Airlines, United Health, Union Pacific, Southwest Airlines, PPG and Xerox
Friday’s names include Air Products, Exelon, General Electric, Kimberly Clark, McDonalds and Schlumberger.
There could also be news on Cadbury in the week ahead, as Hershey reportedly weighs a bid and Kraft considers a new offer.
Banks Must Repay Taxpayers $90 Billion for Bailout: Obama
Declaring “We want our money back,” President Barack Obama wants to slap a tax on banks to recoup the money that the American public spent on bailing out large financial institutions on the brink of collapse.
The president said Thursday his goal is not to punish banks, but rather to prevent them from a behavior of excess, including new employee bonuses he called “obscene.” In brief comments at the White House, Obama took a deeply populist tone.
He said: “My commitment is to the taxpayer.” The president said big banks had shown irresponsibility, engaged in reckless risk for short-term profits, and had gotten themselves into a crisis of their own making.
Some firms would have to pay the fee even though many did not accept any taxpayer assistance.
Obama proposed that major financial firms pay the fee—expected to total $90 billion over 10 years—to protect taxpayers from up to $117 billion in losses on a bank bailout that has spurred fury at Wall Street excess.
Obama’s action comes amid mounting public anger over multi-million dollar bank bonuses while ordinary Americans struggle in the face of 10 percent unemployment.
“The fee that is put forward here is in many ways a minimum — a minimum of what is owed back for the rather significant costs that are borne in many aspects by the taxpayers,” an administration official told reporters.
The levy will recoup losses from a $700 billion taxpayer rescue of U.S. banks called the Troubled Asset Relief Program, or TARP, conceived in 2008 by Obama’s predecessor, George W. Bush, at the height of the global financial panic.
Forged after the collapse of U.S. investment bank Lehman Brothers and multi-billion dollar rescue of insurance giant American International Group
ARP helped stem the crisis by injecting public capital into the biggest U.S. banks and convincing investors no others would be allowed to fail.
The action, together with massive monetary and fiscal policy stimulus from the government and Federal Reserve, was unable to deflect the country’s worst recession since the Great Depression, which has pushed unemployment to a 26-year high.
However, that did not obstruct bumper profits on Wall Street as stock markets rebounded sharply in 2009 from crisis-lows.
This has helped many of the banks repay their TARP injections, freeing them of government rules on compensation and allowing them to now pay out major staff bonuses.
Banks that have already repaid TARP capital will not be spared the fee, and nor will firms that got no TARP money to start with, but nevertheless benefited from the stability it brought to the U.S. economy, the official said.
Full details of the fee proposal will not be laid out until Obama delivers his budget for fiscal 2011 in early February, and will then be subject to shaping by Congress. The plan will include a levy of 15 basis points, or 0.15 percentage point, on the balance sheets of big firms with assets of more than $50 billion.
The Obama administration expects to raise $90 billion over the first 10 years, and thinks this will ultimately cover all losses from TARP, although at the moment these losses are being projected at $117 billion.
“The banks that are in question were significantly responsible for an enormous degree of the reckless risk-taking that was borne throughout the entire economy,” the official said.
AIG will be subject to the fee. But mortgage lenders Fannie Mae and Freddie Mac, which are under government conservatorship, will be excluded, as will U.S. automakers who got bailout money.
Public rage at bankers, whom Obama chided in December for their “fat cat bonuses,” has taken on a deeper political dimension as Democrats who control Congress weigh sweeping financial regulatory reforms in the face of stiff industry opposition.
Wall Street chiefs were grilled Wednesday at the opening hearing of a special inquiry into the 2008 financial crisis and the resulting taxpayer bailout to save their industry.
The White House said Wednesday that an apology was the least the country expects to hear from the banks.
The heads of Goldman Sach, Morgan Stanley, JPMorgan Chase and Bank of America aced the first public hearing of the Financial Crisis Inquiry Commission.
It will convene throughout the year and is expected to issue a report by Dec. 15.
Stocks Shed Losses as Bank Stocks Gain
Stocks turned slightly positive as investors warmed to bank stocks, a day before the White House will announce its plans to charge the industry fees related to the industry’s bailout and as Congress probes the financial system’s collapse.
Major indexes faced pressure most of the morning after energy prices fell on an inventory surge and concerns persisted over global growth. But the mood turned a bit positive as Wells Fargo , Bank of America and others headed higher. BofA earlier was the biggest drag on the Dow.
Energy shares also fell after a report showed a larger than expected surge in inventories.
Oil prices dropped again, falling below $80 a barrel for the first time in 10 days even as the dollar continued to fade.
Chevron was the biggest loser on the Dow 30, which lost an early pop as the market sought to rebound from a losing day Tuesday.
Resource companies also fell, with Southern Copper dropping more than 2.5 percent.
Kraft Foods stoked some investor enthusiasm as it raised its outlook for the second time in two months. Investors even scooped up shares of Alcoa , which led the market lower yesterday after issuing disappointing earnings.
The market fell Tuesday on concerns over earnings and whether monetary tightening in China would stall the global economic recovery.
The China worries seemed to abate somewhat but remained a lingering concern.
“We don’t expect the effects of the current tinkering to be overly disruptive or derail the recovery trend,” Tinconderoga Securities analyst John Stoltzfus wrote in a morning research note that acknowledged a “steep selloff” remains possible. “Likely a look in the rearview mirror sometime down the road will tell us that China’s actions … were sensible and ultimately prudent.”
Technology continued to be a sore spot for the market, though, with chipmakers particularly weak and the Nasdaq lagging its counterparts. shares dropped for the second consecutive day as investors begin to take profits from an aggressive two-month rally in the group.
Google shares fell on news that it may pull out of China because of cyber attacks. Chinese search engine Baidu surged.
AstraZeneca was among the market’s big movers, rising after Credit Suisse upgraded the pharma leader to “neutral” from “underperform.”
Another snapshot of the economy comes at 2 pm New York time, when the Federal Reserve releases its Beige Book, the region by region assessment of economic conditions.
At the same time, the Treasury is out with the December budget statement, expected to show a deficit of $91 billion for the month, compared with a shortfall of $51.8 billion in December of 2008.
Sony gained as it postpones the launch of videogame Gran Turismo 5, citing production issues for the latest in that hot-selling videogame line.
Binary Options Game Plan-USD/CHF Breakout 09/12/09
As you can see in the graph below, the USD/CHF u broke out to a new month high.
It seems like a great scenario for buying USD/CHF binary option call or entering a long spot position.
Binary Options Game Plan for USD/CAD 12/08/09
We have a nice bullish momentum of the USD/CAD with a run from 1.0493 to 1.06670 in just 11 hours of trading. After the ascending triangle breakout at the 1.06460 level was followed by an immediate retreat,
it might indicate a false breakout, and a sharp comeback to the 1.06177 level, Buy a USD/CAD Binary PUT Option in a case of a penetration of the 1.06460.
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Euro Rises as ECB Takes Steps to Scale Back Emergency Measures
By Lukanyo Mnyanda and Anna Rascouet
Dec. 3 (Bloomberg) — The euro rose against the dollar and posted its biggest gain in a month versus the yen as European Central Bank President Jean-Claude Trichet announced the first steps toward scaling back emergency stimulus lending.
The euro climbed to near its strongest level in 16 months versus the dollar after Trichet told reporters in Frankfurt the need for such stimulus measures has diminished. It pared some of the gains after he said the recovery will be “uneven.” The yen slipped against higher-yielding currencies as the MSCI World Index of stocks gained for a fourth consecutive day.
“The fact is that stimulus is being withdrawn and growth is a little firmer than expectations,” said Jeremy Stretch, senior currency strategist at Rabobank International in London. “That’s keeping the euro well supported.”
Gold may rise after climbing to a record in New York for a third day as investors sought protection from a weakening dollar.
Dec. 3 (Bloomberg) — Gold may rise after climbing to a record in New York for a third day as investors sought protection from a weakening dollar.
The dollar fell as much as 0.6 percent against the euro on speculation the European Central Bank will announce plans to scale back emergency lending after keeping its main interest rate at a record low. Gold futures, which usually move inversely to the greenback, have added 38 percent this year as the U.S. Dollar Index has lost 8.4 percent, sparking inflation concern.
“Momentum is very positive for gold,” Eliane Tanner, an analyst at Credit Suisse Group AG in Zurich, said today by phone. “Weakness in the dollar is expected to go on until the end of the year. Gold could have a strong year-end rally.”
