U.S. stocks extended a global drop as concern grew that the rally has outpaced the prospects for economic growth. The yen and the dollar strengthened, oil tumbled and yields on Treasury three-month bills turned negative for the first time since financial markets froze last year.
The MSCI World Index of equities 23 developed countries dropped 1.7 percent at 4:31 p.m. in New York, its steepest loss this month. The Standard & Poor’s 500 Index fell 1.3 percent to 1,094.90 as Bank of America Corp. downgraded chipmakers, sending Intel Corp. and Texas Instruments Inc. down at least 3.4 percent. The yen climbed against all 16 of its most-traded counterparts and the Dollar Index rose as much as 0.5 percent. Aluminum and copper led declines in industrial metals.
Stocks slid amid speculation the eight-month, 68 percent rally that drove the valuation of the MSCI World Index to the most expensive level in seven years already reflects forecasts for a 25 percent rebound in corporate earnings next year. The Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year to 1.9 percent in a report today, while saying that mounting debt burdens will keep the expansion in check.
“It makes perfect sense that the market’s going to take a little bit of a breather,” said Michael Mullaney, who manages $9 billion at Fiduciary Trust Co. in Boston. “Sentiment had gotten a little too bullish.”
Fall From Peak
The S&P 500 retreated from a 13-month high for a second day even as the Labor Department said the number of Americans filing claims for unemployment benefits held at a 10-month low and the Federal Reserve Bank of Philadelphia’s general economic index rose more than estimated. The Dow Jones Industrial Average lost 93.87 points, or 0.9 percent, to 10,332.44.
Rates turned negative on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at primary dealer Jefferies & Co. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.
‘Painful Level’
“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”
The two-year note yield fell five basis points to 0.70 percent at 4:24 p.m. in New York, according to BGCantor Market Data. The 1 percent security due October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 18/32. The yield touched 0.6759, the lowest since Dec. 19. It fell to an all-time low of 0.6044 percent on Dec. 17.
Today’s slide in the S&P 500 was the biggest since Oct. 30, when the benchmark for U.S. stocks dropped 2.8 percent.
Intel, the world’s largest maker of semiconductors, fell 4.1 percent and Texas Instruments, the second-biggest, dropped 3.4 percent. Dan Heyler, head of Asian semiconductor research at Merrill, said the supply of chips is growing faster than demand, putting earnings at risk. Intel and Texas Instruments were lowered to “neutral” from “buy” and the global chip industry was cut to “negative” from “positive.”
Chip Stocks, Alcoa
Semiconductor stocks in the S&P 500 lost 3.7 percent as a group, the largest tumble among 24 industry groups.
Alcoa Inc. declined 3.9 percent for the second-steepest drop in the Dow as aluminum, copper, lead, nickel and tin all retreated.
ConocoPhillips, the third-largest U.S. oil company, slipped 1.9 percent and Chevron Corp. lost 2 percent as crude fell for the first time in four days. Schlumberger Ltd., the world’s biggest oilfield-services provider, lost 3.3 percent. Crude for delivery next month tumbled 2.6 percent to $77.50 a barrel.
Energy producers in the S&P 500 fell 2.1 percent as a group, the biggest drop among its 10 industries. Technology shares, the largest group in the index, lost 1.6 percent and contributed the most to the decline.
‘Grossly Overvalued’
Bank shares slid after Meredith Whitney, the analyst who correctly predicted in 2007 that Citigroup Inc. would cut its dividend, said lenders “are still grossly overvalued” and reliant on government purchases of mortgage-backed securities.
JPMorgan Chase & Co., the second-largest U.S. bank, and Wells Fargo & Co., the fourth-biggest, each dropped 1.9 percent. The S&P 500 Financials Index slumped 2 percent.
Writedowns of mortgage-backed debt contributed to a combined $1.7 trillion of losses by financial companies globally since the beginning of 2007. Mortgage delinquencies have continued to rise as job losses render consumers unable to stay current on their debt payments.
One out of every six home loans insured by the Federal Housing Administration was late by at least one payment and 3.32 percent were in foreclosure in the third quarter, the highest for both since at least 1979, the Mortgage Bankers Association said today.
Share Sales
Asian stocks declined, dragging the MSCI Asia Pacific Index down for a third day, as share-sale plans at Japanese companies raised concern the value of existing holdings will be reduced. Mitsubishi UFJ Financial Group Inc. sank 3.7 percent and Nomura Real Estate Residential Fund Inc. slumped 8.6 percent after filing to sell stock.
The yen appreciated 0.6 percent against the euro and 0.3 percent against the dollar. The dollar advanced 0.3 percent to $1.4916 versus the euro as it strengthened against all 16 major counterparts except the yen.
“The yen and U.S. dollar have been supported by the continued upturn in risk-averse conditions,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a report. “Current conditions remain unfavorable for risk assets, leaving them vulnerable to a correction lower.”
The combined economy of the OECD’s 30 member countries will expand 1.9 percent next year and 2.5 percent in 2011, the Paris- based organization said. Output will contract 3.5 percent this year. The 2010 forecast compares with the 0.7 percent growth predicted by the OECD in June, when the major economies were just beginning to emerge from their worst recession in more than half a century.
Losing Confidence
President Barack Obama said in an interview with Fox News recorded in Beijing that the U.S. must get the federal deficit under control. If the government continues to pile up debt, “people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.
Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.
The U.S. will auction $44 billion of two-year notes on Nov. 23, $42 billion of five-year debt on Nov. 24 and $32 billion of seven-year securities on Nov. 25. The $44 billion in two-year notes matches a record and the five- and seven-year amounts are both records.
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Earlier this week, Asian & European markets showed another failure to respond to Mondays 1.4% gains in US equity indices (Dow & S&P), further highlighting the unsustainability of the gains in indices, which had become increasingly dollar-driven (caused by prolonged USD weakness resulting from Fed officials failed attempts to support it) instead of improved economic figures. Indeed, the absence of further improvement in fundamentals (4-month lows in Oct industrial production, slowing core Oct retail sales and 6-month lows in Oct housing starts) underscores the role of USD weakness as the main driver to higher equities.
Yet, while the dollar index hit fresh 15-month lows on Monday at $74.68, oil failed to regain its interim resistance of $80.50 (not even mentioning the year high of $82). Such failure was especially prominent following the higher than expected decline in oil inventory drawdown. Last weeks brief break below $76 underscores the emerging bearishness in the fuel, which suggests a swift renewal of fresh shorts to retest the 75.53, which is the 38% retracement of the rally from the 64.98 low to the 82.06 high. And should the pattern of previous down cycles repeat itself in oil, a steeper decline could be in the woks, likely calling up the 73 handle.
Oil's inability to preserve rallies in the face of USD weakness reflects the lack of sustainability of speculative flows to elevate the fuel as real demand falters (shown by 2 consecutive weekly higher than expected builds in oil inventories). The chart below shows a downward drift in the Oil /EURUSD ratio, resulting from a more rapid appreciation in the euro (more rapid depreciation in USD) than an appreciation in the price of oil. Note how this pattern occurs after a rise in the ratio in October, which emerged as a result of a more rapid increase in oil relative to the rise in the euro. Said differently, oil is losing its ability to respond to USD weakness. Thus, any catalyst driving USD strength (stocks correction, Chinese remarks on commodities or less dovish rhetoric from Fed officials), would especially accelerate oil selling.
Oil's relative weakness has also been highlighted against equities (S&P500 and Dow), as the equity/oil ratio surged to a 4-week high. Interestingly, US equities have outpaced those in Japan (Dow/Nikkei at highest since Dec 08), UK (Dow/FTSE at 3-month highs). Could relative strength of US equity indices be the product of currency weakness and not much more? We have already raised the S&P500s recurring failure to recover 50% of the decline from the 2007 record high to the 2006 low (1,120). The equivalent 50% retracement for the Dow stands at 10,335, which was broken on Mon, Tues, Wed but has yet to do so for the week (on Friday).
A weekly close below the 10,335 in the Dow, below 1,120 in S&P500 and a confirmed downtrend in oil (close blow $79 and 5th straight weekly lower high), would establish markets fading dynamic for risk appetite. This was already established on the currency side, amid the protracted yen strength. We warned last that yen strength would continue outperforming the much-talked-about-USD strength by pundits. Deepening weakness in oil and equities would help stabilize USD (instead of propping any major rally beyond 7%), but JPY will continue to show the greater rebound, Subscribers to our Intraday Market Thoughts are kept informed of the periodic shifts in risk appetite and the interpaly between the USD dollar and Japanese yen in drawing risk aversion flows.
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As we are heading into the last month of the year, we take this opportunity to look a one of our favorite topics in forex, seasonality. We have long discussed how, during certain months, currency pairs show a consistent bias to rise or fall and December is clearly no different. Along with the chaos of the end of the year has come a very stable and significant pattern that may hint at further dollar weakness.
A look at the price action of the EUR/USD over the past 11 years reveals a distinct pattern. Since 1998, seven out of the last eleven Decembers the euro performed strongly. Of course, the first thing that strikes you when looking at the chart is the 10.0% jump last year. Even though one might think this was a bit of an anomaly, we see similar outperformance in past years. For instance, in 2000 there was a nearly 8.0% jump, while in 2002 we saw a 5.5% rally. When it comes to this seasonality study, it turns out that magnitude is more important than probability. Even though 7 out of 11 are not very trustworthy odds, it is more important to focus on the fact that if December did result in a loss, those declines were capped at -0.47%. This end of year flow may be indicative of foreigners selling dollars and repatriating those funds back home.
A number of factors may be behind these patterns including fiscal year end flows, demand for commodities, import and export trends or even travel. However, for whatever reason, pairs other than the euro, kiwi, and aussie did not show as significant results.
Trading Seasonality
As you can see from the charts above, seasonality does not hold 100 percent of the time, so the best way to incorporate it into your FX trading is to simply keep it in the back of your mind. For example, it may be better to look for opportunities to buy NZD/USD in the month of December than to sell it. Seasonal trades do not always duplicate themselves, which is why trading seasonality blindly by selling at the beginning of the month and buying it back at the end of the month may not always be the best thing to do, but what seasonality does show us is where the probabilities are skewed.
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Tokyo Hits 4-Month Low
Japan's Nikkei Average fell to a four-month closing low as financials, autos and a broad range of exporters lost ground.
Disappointing U.S. data renewed worries about the economic recovery and weighed on sentiment.
Financials came under pressure, after Mitsubishi UFJ said on Wednesday it would raise a massive $11 billion to meet stricter capital rules. MUFJ shares slumped 4.1 percent while Sumitomo Mitsui lost 4.9 percent.
Economic worries and a stronger yen hurt a broad range of exporters. Honda Motor lost 3.5 percent and Canon shed 3.1 percent.
The benchmark index declined 1.3 percent 9,549.4 points after falling as far as 9,496.07. The broader Topix fell to a six month low and was last quoted down 1.45 percent at 837.7 points.
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range bound, no real lower lows or highs .........just double tops and double bottoms. It would have been good trading this today, very obedient index.
61.8% Fib Retrace = 10410 .....watch this level carefully
10418 is gap down level which acts as resistance and we have failed to trade above it all day.
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This morning's mixed U.S. economic reports had a limited impact on the U.S. dollar. Based upon the consumer price index, inflationary pressures increased in October. However housing starts and building permits took a big tumble which indicates that one of the first sectors to bottom in the U.S. economy is beginning to show pockets of weakness. Housing starts fell 10.6 percent to the lowest level since April while building permits dropped 4 percent to the lowest since May. The market had anticipated increases in both releases, but as we suggested in our Daily Report last night, the sharp decline in builder confidence in October points to weakness in the housing market. There is a lot of inventory on the market and more set to hit over the next year and therefore the lack of demand is discouraging new projects.
Meanwhile consumer prices rose 0.3 percent in October with prices excluding food and energy rising 0.2 percent. On an annualized basis, prices are still slowing albeit at a much more moderate rate. In October, year over year CPI fell 0.2 percent compared to the prior year which represents a marked improvement from the -1.3 percent drop in September. With commodity prices rising, it is not surprising to see the upside pressure on consumer prices. However outside of the contribution from food and energy, there was also a notable increase in car prices and airline fares.
Although the reaction in the currency market to the CPI and housing reports were limited, gold prices continue to hit record highs. Gold bugs are bidding up prices to hedge against inflation and the U.S. dollar. This suggests that at least one group of traders or investors still believe the dollar could be headed lower. Treasury Secretary Geithner and Federal Reserve President Bullard are scheduled to speak this morning.
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IS OIL CONVINCED by the 0.9 mln draw in EIA crude inventories? Oil briefly touched a session high of 80.28 before retreating to the 79.80s. With oil traders aware of the effect of the storm, it is unexpected for oil to reverse its 4-week downtrend and close above $80.50. Dollar also somewhat supported by comments from Atlanta Fed president Bullard indicating that the memory of housing bubble may push Fed to start rate hikes MORE QUICKLY than after past recessions. In the event that oil closes below 79.40, the dialy candle could become a bearish doji, with a relatively high shadow, suggesting fresh downside. EURGBP breaks above the 4wk trend line of 0.8910, calling 0.8930. 0.8975 is the next target after the 61.8% retracment support at 0.8820 managed to hold.
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Markets do not like high inflation and 6-month lows in US housing starts. Dow futures move -16 pts from +20 prior to the data, USDCAD regains 1.05 from 1.0450s , while GBPUSD struggles to hold at $1.68. While the data are negative for risk appetite, markets will remain cautious, especially ahead of EIA report (15:30 GMt), expected to show a build of crude oil inventories +0.8 mln barrels following +1.8 mln barrels. But Tropical Storm Ida may have caused a drawdown of inventories (as did the API report showed -4.4 mln). CADJPY struggles at 85.15 trend line resistance, loking to regain 84.50, EURJPY capped at 133.70 trend line, eyeing 132.80
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The most anticipated event today was the minutes from this month's Bank of England meeting and boy did they deliver. Taking a look at the prerelease levels in the GBP/USD, the currency pair appears to be trading not far from those levels. However, a quick look at intraday charts (shown below) will reveal roller coaster like volatility. Initially the British pound dropped 60 pips against the U.S. dollar on the heels of the release but it recovered almost as quickly yet the gains failed to maintained. Although there was also a tremendous amount of volatility in EUR/GBP, the euro managed to hold onto its gains which suggests that ultimately traders interpreted the BoE minutes as bearish for the currency.
BoE Split 3 Ways
If you recall, at the monetary policy meeting earlier this month, the Bank of England increased their Quantitative Easing program by GBP25 billion. At the time, the market was divided on how much stimulus the Monetary Policy Commitee would deliver - some called for 25B but most called for 50B. Based upon the voting record at the meeting, we learned that one member (Dale) voted to leave the program unchanged while another (Miles) voted for a larger GBP40B increase. The remaining 7 members approved the GBP25B extension and no one voted in favor of a GBP50B move.
Tinge of Hawkishness from Monetary Policy Members
The tone of the Bank of England minutes also contained a tinge of hawkishness. According to the report,"A number of Committee members noted that one consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn, if the projected impact was realised." This can be interpreted two ways - the first being that the BoE is afraid that by stimulating too much, they would be forced to implement an exit strategy prematurely or second, that the 25B QE extension made earlier this month has already forced them to start working on an exit. Either way, additional stimulus from the BoE is becoming increasingly unlikely.
Also, one of the primary reasons why Dale, who is also the Chief Economist of the BoE voted to leave the program unchanged was because of his fears about inflationary pressures and he felt this way before the latest CPI numbers were released (and they were very strong). However at the same time, some members believed that there could be more downside risks to activity in the near term than suggested by the Inflation Report.
On the face of it, the voting record should be positive for sterling. However we are seeing a very reluctant rally in the currency pair because ultimately of all the G7 countries, the U.K.'s central bank is still the most dovish.
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