Stocks, Commodities, Forex Overview: Must Watch Forces and Events, March 8-12, 2010
by Cliff Wachtel CPA March 07, 2010

Just last week at the end of February, the recovery and risk assets (stocks, commodities and in FX commodity dollars and the euro) were struggling.

However, positive news suggesting Greece could avoid default (over the coming months at least), incremental improvements in the US employment picture and other positive economic data kept markets moving in the right direction all week long. Does this mean it’s safe to open new long positions in risk assets?

The Big Picture: Risk Assets Range Bound Until Clarification on Greece

The short answer is: possibly for short term positions, but not for those looking beyond a time horizon of a few days. For now, it’s a range bound market. Find the appropriate ranges for your time-frame, and establish long or short positions at either extreme for the lowest risk/highest probability trades or longer term holds.

S&P DAILY CHART 02 MAR 07

The Greek Debt Crisis Update

It appears to be nearing resolution for at least the coming months. Currently we’re in a definite ‘hope’ phase for reasons given above and discussed in more detail below. However we’ve seen how that can change drastically in the course of a day.

Greece passed new austerity measures, which was a critical step in convincing bond markets and the EU that Greece was still salvageable and deserving of EU support. That made the bond sale possible and indeed successful, raising the odds that Greece survives the coming months, probably via EU bond guarantees that will keep new Greek bond rates affordably low to allow Greece to pay off maturing debt and interest in the coming months.

However, there are still no concrete plans made public, still lots of political opposition on all sides to even the current short term likely solutions. The new Greek austerity plan has sparked a wave of violent protests and strikes, and no one is offering any actual cash aid for Greece at this time. Should bond guarantees prove insufficient, things could get ugly quickly.

Forex Big Picture

Thus our bias remains to a continued USD-positive scenario across the board, based on a brighter outlook for the US relative to more troubled UK and European, and Japanese outlooks.

This has been the driving force over the last several weeks, and the less-bad US Non Farm Payroll report provides another ‘relative’ boost to that theme.

That said, if risk appetites improve more significantly, we may see a reversion to the dynamic that dominated most of 2009, where the USD is sold against all but the JPY, and commodities and risk assets rise.

Given the continued short term oversold nature of the euro and GBP, don’t be surprised to see these make short term jumps on any hopeful news, possibly multi-week moves if news supports a longer burst of risk sentiment that brings markets to the upper ends of their multi-month ranges.

With those reservations noted, we would also observe that the past week was largely spent testing recent risk lows, which held up well, typically suggesting that markets continue to test higher in the coming weeks, especially if indeed the EU helps Greece get through the coming months.

The better-than-feared US jobs report provides a fundamental catalyst to view the risk outlook as continuing to improve, while data out of China next week may provide another boost to risk sentiment.

Forex Focus

US Dollar Weekly Outlook

In addition to the overall better-than-expected economic data and jobs reports, a little noticed but critical change occurred this week that makes the dollar more able to resist the downward pressure of rising risk appetite, while still maintaining its safe-haven appeal. The US three-month Libor rate crossed above its Japanese equivalent. This halts any speculation that the US dollar is a better carry trade funding currency than the Japanese yen. This is one of the main reasons why the dollar has remained somewhat stationary over the past month while equities have started to appreciate and the Japanese yen tumbled.

Does this shift mean that the dollar is no longer pressured by rising risk appetite? No. A strong enough rally in investor optimism would likely spur the dollar to losses as there are still bigger factors (like the long-term trends to diversify away from a dependence on the dollar, and its low rates).

More significantly, a pullback in capital markets (a rise in risk aversion) would still play to the benchmark’s appeal as a safe haven. Clearly, however, we’re seeing multiple signs that the dollar is moving away from the extreme safety-end of the risk spectrum, with economic fundamentals improving and the Fed slowly going more hawkish.

Still, the biggest story in the markets, the EU debt crisis, will be the biggest factor in near term US dollar moves. Should the Greek situation suddenly deteriorate or Spain, Portugal or Italy find themselves in similar positions, the dollar’s perceived safe haven appeal would send it higher.

Euro Weekly Outlook Up

In addition to the apparent near-term resolution of the Greek deficit crisis, market talk was rife with reports of quasi-official interest to buy EUR/USD below 1.3550, which meshes with an EU desire to prevent a speculative assault on the euro. Both strongly favor a jump in the EUR/USD, barring some unforeseen factor dampening risk appetite. That the EUR has stabilized despite the continued absence of a concrete Greek rescue/support plan also suggests the uncertainty is now priced in, and a higher likelihood of upside action in the week ahead.

Longer term, however, the incidence of stringent budget reform this year in the relative large economy of Spain as well as smaller ones such as Greece, Portugal and Ireland will have economic consequences throughout the EMU. Germany is still reliant on exports for growth suggesting that the impact will be felt broadly throughout the EMU region. Insofar as inflation is extremely subdued in the euro zone (1.0% y/y) there is very little risk of a rate hike from the ECB well into 2011. The interest rate differential is likely to continue weighing on EUR/USD, suggesting that while EUR/USD may edge a little higher near-term, there is room for further downside over the coming 3-6 months, especially if the pullback in stocks that many predict comes to pass.

Yen Weekly Outlook Down

As well, moves by the MOF in Japan to increase the size of its FX fund were taken as a signal additional JPY strength is likely to be resisted by intervention. Additionally, rising risk appetite, which will benefit further from a likely short term loan guarantee for Greece that allows it to sell more bonds at affordable rates and survive the coming months, could also pressure this ultimate safe-haven currency.

British Pound Weekly Outlook Up

A look at the weekly candlesticks also shows several significant reversal patterns. In particular, GBP/USD posted a prominent ‘hammer,’ a bullish reversal pattern after a decline, which was matched in EUR/GBP by a large ’shooting star’, a bearish reversal pattern after an advance.

Despite the sterling’s deep fundamental troubles, a corrective bounce looks imminent and we would look to buy dips back to the 1.4950/.5050 area. EUR/USD has also posted 3 weekly doji/spinning tops in a row, suggesting uncertainty and a volatile resolution in the near future.

Canadian Dollar and Swiss Franc

These will likely continue to move with overall risk appetite. There are of course unique drivers for each. The Swiss franc will tend to track the euro as the SNB attempts to keep the franc from appreciating vs. the euro. The Canadian dollar is more sensitive to oil and to US news. Should the CAD’s gains on the USD continue, BoC intervention is not out of the question, as the US accounts for about 75% of Canadian exports. The AUD, with its high interest rate, will tend to be the biggest beneficiary of rising risk appetite, and vice versa.

Given still excessive short-EUR/USD and short-GBP/USD positioning, we think the prospects are ripe for a correction higher, moves which we would not fade for quite some distance. USD/JPY seems on better footing now that it’s back inside its cloud, and together with the potential for a rebound in EUR and GBP/fresh gains in AUD and CAD, there is potential for a break higher in the JPY-crosses. We’ll need to see a benign/positive news environment for risk appetites to recover, so we will stay nimble and roll with the data/events, but risk may surprise higher.

US Jobs Reports Beat Forecasts and Implications

The US nonfarm payrolls report provided a pleasant surprise to the market as it came in much better than expected at -36K (consensus had -68K baked in) and the prior two months were revised up a net +35K. If that wasn’t enough to whet the appetite for risk, the unemployment rate printed 9.7% and was steady (market expected an increase to 9.8% or worse).

The details of the report showed an even more constructive outlook for the job market than the headline prints suggested. Temporary help workers saw another 48K increase, the fifth consecutive month of sizeable gains. This is a leading indicator of future employment as temporary help is usually what companies will add first. Aggregate hours fell -0.3% after a 0.3% gain the prior month, but this was much less than we would have expected given the significant weather impact on this report. The three-month trend continues to improve for the second consecutive month. To illustrate just how large the seasonal impact was, we look at those people "not at work due to weather" during the month. This number spiked to above 1 million and this is significantly above the 265K average (for the February month) since 2000 – palpable indeed. Extracting the weather effect, the payrolls number would have likely been closer to around +200K.

Implications

If anything close to that number appears next month, it would be a substantial boost for risk appetite, particularly for certain US-related assets like the dollar. Jobs and consumer spending are the key metrics the Fed is using for deciding the pace and extent of its stimulus withdrawal and rate increases. Expectations for both would rise, boosting the US dollar. The impact on stocks would be harder to gauge. While improving employment is good for stocks, the likelihood of rising interest rates is not.

We suspect stocks and commodities would benefit from improved jobs figures overall, given that any actual rate increases would still leave rates very low.

Key Data And Events To Watch Next Week

The Greek and EU debt crisis remain the big story, and any major surprises on this could jolt markets. The EU is due to announce its assessment of Greece on March 16th, so it’s possible that there could be leaks or speculation on that outcome.

US Calendar Events

The calendar in the United States lightens up a touch but still has some important top-tier numbers on deck.

EU Calendar Events

It is a relatively quiet week in the euro zone.

Other

DISCLOSURE: No Positions

About the author:
Cliff Wachtel, CPA, is the Chief Analyst for AVAFX, a leading online trading site for global currency,commodity, and stock index trading, at www.avafx.com. He is also listed in the Who's Who of Financial Bloggers. He has served as investor, writer, and advisor on stocks for many years. In addition to forex, commodities, international stock indices, and the inter-relationships between these markets, he writes on quality high dividend stocks -- those with high, sustainable dividends backed by sound businesses with solid fundamentals.

Subscribe to our Free Newsletter

Join Us