Risk markets attempted a recovery last week on some positive news as Germany and Finland approved expansion of the EFSF while Troika returned to Greece finally. However, strength of the recovery was far from impressive and lost momentum towards the end of the week. While major US and European stock indices managed to hold well above recent low, the CRB commodity index made a new low on Friday and closed below 300 level for first in almost a year. Dollar index’s retreat was rather shallow and was contained at 77.30 while Friday’s rally put the index back pressing recent high of 78.86. This could also be reflected in major dollar pairs which lost momentum. Commodity currencies also turned weak with Canadian dollar and New Zealand dollar making new record low against US dollar.
Markets are facing a number of even risks this week and it’s great opportunity for traders to watch the reactions, and thus, get a sense on the underlying sentiments. China manufacturing PMI was released on Saturday and has surprisingly rose to 51.2 in September. More importantly, this marked the second consecutive months of increase, though little. There have been much worries on hard landing in China. While PMI only showed little improvements in the outlook, at least, it’s not deteriorating and indicates that economic development is stabilizing.
EU finance ministers are not likely to approve the disbursements of next EUR 8b tranche of Greece bailout this week. However troika, the EU/IMF/ECB inspection team will complete an evaluation as early as on Monday and thus give the signal on whether Greece has done their austerity jobs satisfactorily. Also, as the Bundestag has now passed the bill for expanding the EFSF, there would possibly be some news on how the fund would be enlarged to a size that’s capable to contain Italy and Spain eventually.
While the surprised surge in inflation dented hope for a rate cut from ECB, the bank would nonetheless announce new stimulus measures in Trichet’s last meeting as President this week. The unconventional measures to be adopted would include resumption of the one-year refinancing operations and restart of covered-bonds purchase. These should be positive to the markets.
While these events might trigger some recovery in risk markets, we’d anticipate that the impact would be short-lived. We’re staying bearish in risks and bullish in dollar. The technical developments suggest that dollar is ready for another round of rally this week while stocks would likely revisit recent lows. Market sentiment would once again be proved to remain bearish if the above mentioned events fail to provided sustainable boost to risk markets. And, extension in decline in the CRB, if accompanied by a break of 10600 level in dow, and a sustained break of 79 in dollar index, should confirm the trend of risk selling in the first half of Q4.
The week ahead
In addition to the above events, Fed will also start the operation twist program on October. Fed will purchase a total of $44b of longer-mautrity treasuries and sell that same amount of short term debts. Four central banks will meet including RBA, ECB, BoE and BoJ. In addition, there will be key economic data release including Japanese Tankan, UK PMIs, US ISM indices and Non-farm payroll, Canadian job report. So, be prepared for a busy and volatile week.
- Monday: Japanese quarterly Tankan; Swiss retail sales, SVME PMI; Eurozone PMI manufacturing final; UK PMI manufacturing; US ISM manufacturing
- Tuesday: Australian building approvals, trade balance, RBA rate decision; UK construction PMI; Bernanke speech, US factory orders
- Wednesday: Australian retail sales; Eurozone PMI services final, retail sales; UK services PMI, GDP final; US ADP job, ISM services
- Thursday: BoE rate decision; ECB rate decisions; Canada building permits, Ivey PMI; US jobless claims
- Friday: BoJ rate decision; Swiss unemployment; UK PPI; Canada employment; US non-farm payrolls
Technical Highlights
Dollar index’s strong rally on Friday suggests that recent rise from 72.69 is ready to resume. Initial focus is on 78.86 resistance today and break there will confirm this bullish case and should send the index through 80 psychological level to 50% retracement of 88.70 to 72.69 at 80.69 next. Break of last week’s low of 77.30 will delay this case and bring more consolidations but we’ll stay bullish as long as 76.06 support holds.
The CRB commodity index extended recent down trend to close at 298.15. Near term outlook will remain bearish as long as last week’s high of 312.26 holds and further fall should be seen to 50% retracement of 200.15 to 370.70 at 285.43. The main focus would indeed be on whether the current decline would accelerate again. That’s crucial in determining whether CRB could draw support inside 247.25/293.75 zone and rebound.
S&P 500 stayed in recently established range last week but felt strong pressure well ahead of 55 weeks EMA at 1230.3. While the 38.2% retracement support at 1101.7 might provide some more support in near term, it shouldn’t last long. Friday’s fall puts initial focus this week on 1101.54 recent low. Break there will resume whole decline from 1370.58 and should send the index through 1010.91 support within October. In any case, we’ll stay bearish as long as 1258 head and shoulder resistance holds.
EUR/USD turned into brief recovery last week but such recovery was likely finished at 1.3689 already. Initial bias is mildly on the downside this week for 1.3362 first. Break will confirm resumption of recent decline and should target 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level. On the upside, above 1.3689 will delay the bearish case and bring more consolidations. But recovery is, nonetheless, expected to be limited below 1.3936 resistance and bring another fall eventually.
In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it’s merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we’ll stay bearish in EUR/USD.
In the long term picture, EUR/USD turned into a long term consolidation pattern since reaching 1.6039 in 2008. Such consolidation is still in progress and we’d expect range trading to continue for some time between 1.1639 and 1.6039.
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