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Risk aversion returns, but markets so far refuse to press the panic button

Wed, Nov 12 2008, 08:39 GMT
by John Hardy

Saxo Bank

EURJPY fails to hold new two-week lows. Hopes turn to this weekend's G20 meeting for new stimulus initiatives on global scale.

MAJOR HEADLINES – PREVIOUS SESSION

• US Weekly ABC Consumer Confidence out at -50 vs. -49 expected

• Australia Nov. Westpac Consumer Confidence out at 4.3%

• Australia Q3 Wage Cost Index rose 4.1% YoY vs. 4.2% expected

• China Oct. Retail Sales rose 22.0% YoY as expected.

• Japan Oct. Consumer Confidence out at 29.8 vs. 29.5 and 31.8 in Sep.

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• UK Oct. Jobless Claims Change (0930)

• UK Sep. Average Earnings (0930)

• UK Bank of England Quarterly Inflation Report (0930)

• EuroZone Sep. Industrial Production (1000)

• US Treasury Secretary Paulson to Speak (1530)

• New Zealand Oct. Business PMI (2130)

• New Zealand Sep. Retail Sales (2145)

• Japan Oct. Domestic CGPI (2350)

• China Oct. Industrial Production (0200)

Market Comment:

The EUR certainly received no support from a better than expected ZEW survey yesterday (-53.5 vs. -63 expected) as the focus on continued risk aversion spelled trouble for the single currency and EURUSD and EURJPY posted new two-week lows late yesterday and overnight, though these lows haven't held into the early part of the European session today. The EU's Juncker was also out with extremely dovish talk that helped talk EURGBP down from new highs set yesterday. The inability to hold new momentum-style breaks across markets suggests some of the energy is coming out of the market. One reason yesterday's moves may have been a bit hesitant yesterday was that the US bond market was closed yesterday for veteran's day.

One sign of the inability of markets to work up a sustainable good mood was yesterday's announcement from Fannie Mae of new measures aimed at stemming foreclosures on delinquent mortgage holders. The announcement triggered a sharp rally in equity indices yesterday that had the usual effect of weakening the USD and JPY, but the rally was quickly erased within an hour. The way that these rally attempts are quickly erased is a sign that risk aversion predominates, though the bears also seem to have a hard time sustaining momentum. Today, Mr. Paulson will be out speaking about the TARP plan, and we are likely to see him announcing new directions for the plan and a request for more money, as the government has already burned through most of the first $350 billion of the $700 billion package, and Congress has a lot more to say about how the remaining half of the fund is to be spent. Many are looking toward Detroit as lawmakers seem to be gearing up for big bailout of the US automakers, who are quickly burning through their remaining cash reserves. Whatever Paulson's announcement, today may offer another opportunity to see a weak attempt at a rally in risk appetite that could be worth fading.

Hopes are growing that this weekend's G20 meeting will see some kind of new and large stimulus plan aimed at the developing economies. This morning's FT is trumpeting World Bank plans to stimulate developing countries to the tune of $100 billion. It is hard to imagine the G20 taking dramatic new steps with a US president in the final two months of his term, though some kind of loan package is inevitable. Funding for further programs will be tough to come by for developing nations in the future as all major powers are hard pressed on the domestic front and generosity could fade with tough times at home. Some speculate that funds for a bailout could come from Chinese and other sovereign wealth funds, but as we saw from the size of the recent Chinese stimulus package: these funds may be seen as domestic spending warchests more than anything in this cycle of economic weakness. Any broader efforts by the G20 will have to await a president Obama, and the G20 is set to reconvene by late February.

Looking at the market in the short term, we still see more opportunity in shorting risk appetite rally attempts unless the markets manage to rally sharply and close at elevated levels in the North American session. EURUSD final short term resistance comes in around 1.2675 and USDCAD needs to find support in the 1.2000-1.1980 zone (we're surprised USDCAD isn't trading much higher considering yesterday's close below $60 in crude oil)

Chart: EURJPY

EURJPY finally posted a new 10-day low yesterday after a long period of trading in a range, and yet that low was rejected in the late Asian and early European session. Moves across markets seem to be having a hard time showing any follow through lately. Still, some short term resistance is still in place in EURJPY at around 123.80, and a new low below 121.20 would reinvigorate the bearish argument and lead to a test of 120.00 and beyond if risk aversion heats up again. To the upside, the bigger resistance comes in at the 21-day SMA (blue line), which has been an obvious focus over the last several trading days.

Published on  Wed, Nov 12 2008, 08:42 GMT