Tale of two markets:
If you started the trade day believing market participants in Asia, the world was coming to an end... if you ended the trade day believing European and North American market participants, the world has been fixed and there's nothing to worry about...
So who is right and who is wrong? We'll probably never know and it probably doesn't matter because what we saw between Sunday evening (NY time) and the close of Wall St. on Monday afternoon were participants running on pure emotion, capitalizing on thin conditions, and jumping on every piece of news or rhetoric that hit the wires the past 24-hours.
When Asia opened up last night the S&P 500 and Dow futures, EUR/USD, GBP/USD, crude oil and the yen crosses were all at vulnerable downside levels and Asian participants took advantage of the situation, sending all those markets lower as the Nikkei plunged by over 2.54%.
When Asian players left the market this morning, the S&P 500 futures was on its lows just under the 870 level but then as Frankfurt, London, and NY money-flows hit the markets, the S&P 500 futures did a 180-degree turn and never looked back, going all the way to the 897 level. The same exact moment the S&P 500 futures bottomed, the EUR/USD also bottomed and moved up over 200-points by the time Wall St. closed.
The S&P 500 cash market closed positive by 2.5% while the Dow Jones made a 2.3% gain, pressuring both the dollar and yen lower against the majors and crosses. It's not too surprising to see these kinds of moves a day before earnings season kicks into gear because there are a lot of high hopes for better than expected numbers and upside surprises.
The fear in Asia and euphoria o n Wall St. shows a clear lack of any established trend for the markets and I expect participants to remain directionless as their emotions are controlled by news and data and various rhetoric throughout the rest of the week.
Dollar slides on news of $1.09 trillion budget deficit:
Back in June of 2008 the federal budget showed a surplus of $33.5 billion and just one year later there was a shortfall of $94.3 billion, leading to a 2009 fiscal year deficit of almost $1.09 trillion. This is the first time in 18-years that there was a deficit in the month of June and it is the second worst monthly deficit on record.
As the data hit the wires and was digested by the markets the dollar began to slide against the euro and pound sterling and in under 90-minutes both the EUR/USD and GBP/USD were breaking session highs. Wall St. seemed thrilled to see the government was spending like a drunken sailor as the S&P 500 and Dow got a boost, pressuring the dollar and yen even lower.
Since the fiscal year started, the federal government has spent $2.67 trillion but has only taken in revenues of $1.59 trillion. Year-over-year, personal income tax revenue has dropped by over 20% and corporate tax revenues are down a staggering 57%. By October 2009 the Treasury is forecasting a budget deficit of $1.84 trillion, for outlays to possibly reach $4 trillion and for income revenues to be around $2.16 trillion.
These kind of fundamentals are obviously not good news for the dollar, especially if growth stagnates because this trend of rising deficits and diminished revenues leads to a higher debt-to-GDP ratio which is really bad news for any currency. Deficits are more manageable in seasons of growth because the government's intake of revenues rises in accordance with economic growth but in season of high and rising unemployment, spending will always outpace revenue and those are negative contributing factors for the dollar.
More irregularities with German banks:
It's no secret the European banking system remains troubled due to issues with over-leveraging and being stuck with toxic assets similar to US banks but now we are discovering that German banks may be hoarding cash. This calls the health of German banks into question for one simple reason -- the lifeblood of any bank is lending and issuing credit. But according to ECB Trichet, German Finance Minister Peer Steinbrueck, and German companies, German banks are not lending but are stockpiling cash. For what reason? That's the big question.
A bank that stops lending is the equivalent to a McDonald's that stops selling hamburgers and fries... it raises a red flag. The ECB undertook a monumental effort to encourage banks to lend when it pumped €442 billion ($619 billion) into the European money markets. The one-year tender was offered at a ridiculously low interest rate which was fixed at 1%. The main objective of the liquidity injection is to give both German and European banks strong confidence to re-inject those funds back into the economy in order to stop the rapid contraction of growth and to help free up the frozen credit markets in the Eurozone. Why would a bank not lend and how could they not make money when they are only paying a 1% premium? It doesn't quite add up...
Just last week a German business magazine, WirtschaftsWoche, released the results of a business survey which showed 57% respondents had trouble getting credit and were feeling a credit squeeze. On this issue, ECB Trichet commented:
"We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes; we all have to contribute to the continued functioning of our economy in these very difficult times"
Germany's Steinbrueck had stronger rhetoric for German banks, saying:
"You will understand that these aren't just words. I will keep an eye on credit lending, request reports and will work together closely with the Bundesbank against this background."
What Steinbrueck has threatened is going to extraordinary measures to force banks to lend if he does not see improvement by 1-September. Now, what makes this story a little odd is that Steinbrueck also made comments about how Europe could still face a severe credit crisis in the near future. On one hand he's warning banks about another potential credit crunch and then on the other hand he's telling the banks to start lending or else.
What does all this have to do with the EUR/USD? Well, although there hasn't been a massive meltdown within the European banking system I'm still convinced there is enough stress within the banking system to lead to a future devaluation of the euro. Also, if there is truly a credit squeeze in Germany, there would also be a credit squeeze in the rest of the Eurozone and the lack of credit expansion and M3 growth is highly deflationary. These deflationary factors are very negative and would also devalue the euro should they accelerate and come into play in the markets. It is the deflationary aspect to this issue which traders should most closely monitor in regards to any potential fallout in the future as this would have direct impact on the EUR/USD.
Tuesday trading:
Wall St. will be the center of the universe tomorrow for all participants in the Forex, commodity, and equity markets. What traders need to be on the lookout for is whether or not today was a classic case of "buy the rumor, sell the fact" or if participants were pre-positioning for another run up. The markets definitely bought the rumor today, now we'll need to see if they sell the fact...
I've started the week so far very untrusting of the markets, untrusting of all the moves we've seen the past 24-hours, and I'd rather not be in a trade than have to take a loss on a trade. I do think tomorrow will give a little more clarity once the markets get settled in and get some real data to work with.
Beside all the earnings mayhem going on tomorrow, the markets will have to contend with a decent amount of key fundamental data, mostly revolving around inflation, retail sales, and the consumer. Out of Europe we get German and Eurozone ZEW which I am expecting to print at or better than expected. Eurozone Industrial Production will print the same time as ZEW and I'm expecting a better print than last month's -1.9%.
For the dollar we have two big fundamental events -- PPI and Retail Sales. It should be fairly cut and dry with those reports... equities, crude, gold, and pairs like the EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY all want and need to see higher price inflation and some sort of a recovery sign from the consumer. For PPI, energy prices were fairly elevated in June so that may contribute to a positive inflation print, but with inventories still remaining high and the consumer continuing to entrench, its possible those two factors outweigh any upside price pressures from energy costs.
Equities, commodities, and the higher-yielding currencies have shown a pattern of being sensitive to consumer and retail fundamentals the past few months. I can't predict whether we get the truth or not in tomorrow's Retail Sales and Core Retail Sales but if the truth is told I would expect to see the retail data mostly flatlined. No matter what, the markets should jump on the news and the volatility will pick up when the data is released.
As great as Wall St.'s gains were today, if the news and data is lackluster they will be tested tomorrow to see if there was any real conviction behind the moves or if we saw yet another emotional response that can quickly fade. If you trade the FX market during Asia you will be well served to keep an eye on the Nikkei. Should the Nikkei recover its 236-point loss from yesterday and move into positive territory I would expect to see the yen and dollar to come under some pressure, especially after the 2200 EST or 2300 EST time frames this evening.
Lastly, don't discount the power the earnings data holds to move the markets... Goldman Sachs is the big one for tomorrow and they are scheduled to release their earnings data before the bell...
-David
If you started the trade day believing market participants in Asia, the world was coming to an end... if you ended the trade day believing European and North American market participants, the world has been fixed and there's nothing to worry about...
So who is right and who is wrong? We'll probably never know and it probably doesn't matter because what we saw between Sunday evening (NY time) and the close of Wall St. on Monday afternoon were participants running on pure emotion, capitalizing on thin conditions, and jumping on every piece of news or rhetoric that hit the wires the past 24-hours.
When Asia opened up last night the S&P 500 and Dow futures, EUR/USD, GBP/USD, crude oil and the yen crosses were all at vulnerable downside levels and Asian participants took advantage of the situation, sending all those markets lower as the Nikkei plunged by over 2.54%.
When Asian players left the market this morning, the S&P 500 futures was on its lows just under the 870 level but then as Frankfurt, London, and NY money-flows hit the markets, the S&P 500 futures did a 180-degree turn and never looked back, going all the way to the 897 level. The same exact moment the S&P 500 futures bottomed, the EUR/USD also bottomed and moved up over 200-points by the time Wall St. closed.
The S&P 500 cash market closed positive by 2.5% while the Dow Jones made a 2.3% gain, pressuring both the dollar and yen lower against the majors and crosses. It's not too surprising to see these kinds of moves a day before earnings season kicks into gear because there are a lot of high hopes for better than expected numbers and upside surprises.
The fear in Asia and euphoria o n Wall St. shows a clear lack of any established trend for the markets and I expect participants to remain directionless as their emotions are controlled by news and data and various rhetoric throughout the rest of the week.
Dollar slides on news of $1.09 trillion budget deficit:
Back in June of 2008 the federal budget showed a surplus of $33.5 billion and just one year later there was a shortfall of $94.3 billion, leading to a 2009 fiscal year deficit of almost $1.09 trillion. This is the first time in 18-years that there was a deficit in the month of June and it is the second worst monthly deficit on record.
As the data hit the wires and was digested by the markets the dollar began to slide against the euro and pound sterling and in under 90-minutes both the EUR/USD and GBP/USD were breaking session highs. Wall St. seemed thrilled to see the government was spending like a drunken sailor as the S&P 500 and Dow got a boost, pressuring the dollar and yen even lower.
Since the fiscal year started, the federal government has spent $2.67 trillion but has only taken in revenues of $1.59 trillion. Year-over-year, personal income tax revenue has dropped by over 20% and corporate tax revenues are down a staggering 57%. By October 2009 the Treasury is forecasting a budget deficit of $1.84 trillion, for outlays to possibly reach $4 trillion and for income revenues to be around $2.16 trillion.
These kind of fundamentals are obviously not good news for the dollar, especially if growth stagnates because this trend of rising deficits and diminished revenues leads to a higher debt-to-GDP ratio which is really bad news for any currency. Deficits are more manageable in seasons of growth because the government's intake of revenues rises in accordance with economic growth but in season of high and rising unemployment, spending will always outpace revenue and those are negative contributing factors for the dollar.
More irregularities with German banks:
It's no secret the European banking system remains troubled due to issues with over-leveraging and being stuck with toxic assets similar to US banks but now we are discovering that German banks may be hoarding cash. This calls the health of German banks into question for one simple reason -- the lifeblood of any bank is lending and issuing credit. But according to ECB Trichet, German Finance Minister Peer Steinbrueck, and German companies, German banks are not lending but are stockpiling cash. For what reason? That's the big question.
A bank that stops lending is the equivalent to a McDonald's that stops selling hamburgers and fries... it raises a red flag. The ECB undertook a monumental effort to encourage banks to lend when it pumped €442 billion ($619 billion) into the European money markets. The one-year tender was offered at a ridiculously low interest rate which was fixed at 1%. The main objective of the liquidity injection is to give both German and European banks strong confidence to re-inject those funds back into the economy in order to stop the rapid contraction of growth and to help free up the frozen credit markets in the Eurozone. Why would a bank not lend and how could they not make money when they are only paying a 1% premium? It doesn't quite add up...
Just last week a German business magazine, WirtschaftsWoche, released the results of a business survey which showed 57% respondents had trouble getting credit and were feeling a credit squeeze. On this issue, ECB Trichet commented:
"We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes; we all have to contribute to the continued functioning of our economy in these very difficult times"
Germany's Steinbrueck had stronger rhetoric for German banks, saying:
"You will understand that these aren't just words. I will keep an eye on credit lending, request reports and will work together closely with the Bundesbank against this background."
What Steinbrueck has threatened is going to extraordinary measures to force banks to lend if he does not see improvement by 1-September. Now, what makes this story a little odd is that Steinbrueck also made comments about how Europe could still face a severe credit crisis in the near future. On one hand he's warning banks about another potential credit crunch and then on the other hand he's telling the banks to start lending or else.
What does all this have to do with the EUR/USD? Well, although there hasn't been a massive meltdown within the European banking system I'm still convinced there is enough stress within the banking system to lead to a future devaluation of the euro. Also, if there is truly a credit squeeze in Germany, there would also be a credit squeeze in the rest of the Eurozone and the lack of credit expansion and M3 growth is highly deflationary. These deflationary factors are very negative and would also devalue the euro should they accelerate and come into play in the markets. It is the deflationary aspect to this issue which traders should most closely monitor in regards to any potential fallout in the future as this would have direct impact on the EUR/USD.
Tuesday trading:
Wall St. will be the center of the universe tomorrow for all participants in the Forex, commodity, and equity markets. What traders need to be on the lookout for is whether or not today was a classic case of "buy the rumor, sell the fact" or if participants were pre-positioning for another run up. The markets definitely bought the rumor today, now we'll need to see if they sell the fact...
I've started the week so far very untrusting of the markets, untrusting of all the moves we've seen the past 24-hours, and I'd rather not be in a trade than have to take a loss on a trade. I do think tomorrow will give a little more clarity once the markets get settled in and get some real data to work with.
Beside all the earnings mayhem going on tomorrow, the markets will have to contend with a decent amount of key fundamental data, mostly revolving around inflation, retail sales, and the consumer. Out of Europe we get German and Eurozone ZEW which I am expecting to print at or better than expected. Eurozone Industrial Production will print the same time as ZEW and I'm expecting a better print than last month's -1.9%.
For the dollar we have two big fundamental events -- PPI and Retail Sales. It should be fairly cut and dry with those reports... equities, crude, gold, and pairs like the EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY all want and need to see higher price inflation and some sort of a recovery sign from the consumer. For PPI, energy prices were fairly elevated in June so that may contribute to a positive inflation print, but with inventories still remaining high and the consumer continuing to entrench, its possible those two factors outweigh any upside price pressures from energy costs.
Equities, commodities, and the higher-yielding currencies have shown a pattern of being sensitive to consumer and retail fundamentals the past few months. I can't predict whether we get the truth or not in tomorrow's Retail Sales and Core Retail Sales but if the truth is told I would expect to see the retail data mostly flatlined. No matter what, the markets should jump on the news and the volatility will pick up when the data is released.
As great as Wall St.'s gains were today, if the news and data is lackluster they will be tested tomorrow to see if there was any real conviction behind the moves or if we saw yet another emotional response that can quickly fade. If you trade the FX market during Asia you will be well served to keep an eye on the Nikkei. Should the Nikkei recover its 236-point loss from yesterday and move into positive territory I would expect to see the yen and dollar to come under some pressure, especially after the 2200 EST or 2300 EST time frames this evening.
Lastly, don't discount the power the earnings data holds to move the markets... Goldman Sachs is the big one for tomorrow and they are scheduled to release their earnings data before the bell...
-David
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