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A one day wonder or more to come?

Wed, Oct 29 2008, 07:57 GMT
by John Hardy

Saxo Bank

Risk appetite may be mostly about market positioning, end of month rebalancing and upcoming US presidential election.

MAJOR HEADLINES – PREVIOUS SESSION

• US Oct. Consumer Confidence fell to record low at 38.0 vs. 52.0 expected and 61.4 in Sep.

• US Oct. Richmond Fed fell to -26 vs. -23 expected and -18 in Sep.

• US Weekly ABC Consumer Confidence rose to -49 vs. -51 expected and -50 the previous week

• New Zealand Sep. Trade Balance out at -1,183M vs. -550M expected

• Japan Sep Industrial Production out at 1.2% vs. 0.3% expected

• Japan Oct. Small Business Confidence drops to 37.6 vs. 40.2 in Sep.

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Sweden Oct. Consumer Confidence (0815)

• UK Sep. Mortgage Approvals (0930)

• US Sep. Durable Goods Orders (1230)

• Norway Norges Bank Rate Announcement (1300)

• US Weekly Crude Oil and Product Inventories (1435)

• US FOMC Rate Decision (1815)

• New Zealand Sep. Building Permits (2145)

• New Zealand Oct. NBNZ Business Confidence (0100)

Market Comment:

Yesterday showed perhaps more than any other day in market history how markets have their own agenda and only rarely react as one would expect to incoming economic data. Specifically, the October confidence reading rolled in at a jaw dropping level of 38 - by far the lowest number ever posted for this survey in over 40 years of the survey. And yet we see a historic equity market rally and surge in risk appetite across the board on this number. The reason for the surge may have more to do with end of month rebalancing (for funds who have a declared ratio of stocks and bonds, the enormous fall in stocks in October means that their portfolios are tremendously underweight stocks as a percentage of total assets, meaning possible large shifts to rebalance the ratios toward month end). Other reasons for the rally include likely over-positioning as the risk aversion trade was becoming a crowded one and the upcoming US presidential election, now less than a week away.

The rally in risk appetite aside, that consumer confidence number is a sure sign that the US economy is headed for a nasty recession - with the credit crisis as the trigger and with a consumer boycott as the big follow-through phenomenon. When consumers are feeling more pessimistic than they have ever felt in the last four decades, it means that they will be reining in their spending like never before - probably like they never have since the 1930's - which, yes, is the most overused comparison out there these days because the early 1930's economy and today's economy have little in common except for obvious facets like a banking crisis and a credit bubble gone awry. In other words - we're getting a countertrend rally here in risk - it's tradable and interesting, yes, but should also be seen as an opportunity to eventually re-enter the risk aversion trades.

The Fed is widely expected to cut rates 50 basis points at the FOMC meeting announcement this evening (remember, the US does not set back their clocks until this weekend, that is why we are seeing the strange release times this week), a move that is likely fully priced in, though there is the off chance for some twist of phrase in an update monetary policy statement to cause a flutter or two - then again, in today's liquidity conditions, a pin dropping can move EURUSD 50 pips in no time.

Watch out for the Norges Bank rate announcement today, with a cut of 50 bps expected. As long as oil prices remain under pressure, it is looking like a good place to go long EURNOK again soon for a retry at recent highs.

An article out in a Japanese newspaper suggested that the Bank of Japan may be warming up for a 25 basis point cut. This presumably added to the JPY weakness yesterday, though most of the move would likely have happened without this development and the move simply highlighted how overpositioned everyone was in the short term on the long JPY trade. Fiddling with the paltry 50 basis points of overnight rates will have little effect in our view in the bigger scheme of things.

The USDJPY rally fizzled quickly overnight as it struggled for oxygen after a neck breaking rise of record proportions in modern market history. We were looking yesterday at the potential for a counter-trend rally after warning signs that things may be getting overdone, but now the countertrend rally has moved so far so quickly that we are already in a mode where we are looking for it to end sooner rather than later. Still, USDJPY may have a go or two at the 100.00 level and EURUSD could look toward 1.3050 before we see a turnaround. Another risk is that we begin to carve out a big and ugly range with treacherous whipsaws back and forth after such a long time in strong trending mode (this is a high probability scenario given our maxim that the market mistress is usually out to frustrate the maximum number of participants at any given time.

Looking ahead on the economic calendar, we note the preliminary US Q3 GDP release tomorrow, which is expected to show the worst quarterly growth number since 2001 at -0.5% (even with the grossly manipulated inflation numbers).

Chart: USDJPY

JPY remains the highest beta currency. Real gunslingers will trade AUDJPY, while those looking for a lower beta trade can look at USDJPY, because both currencies are weak and the moves are less uncivilized, even if yesterday showed the potential for volatility here (keep the appropriate leverage!). If this rally continues, we may eventually look at the Ichimoku cloud area on the weekly chart just under 103.00 (that key, key flatline resistance area as well) before finding resistance. To the downside, the 94.25 zone is a big retracement level. Another scenario could be that we retest lower first before attempting to take out 100.00 again - this would be a typical throwback scenario that is seen at intermediate market bottoms.

Published on  Wed, Oct 29 2008, 08:00 GMT