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Market treading water, gauging whether correction will continue or reverse back to the old trend

Tue, Oct 27 2009, 13:49 GMT
by John Hardy

Saxo Bank

AUD vulnerable if risk aversion trade remains on and if tonight's inflation data comes in lower than expected.

MAJOR HEADLINES – PREVIOUS SESSION

• Australia Q3 NAB Business Confidence rose to 16 from -4 in Q2

• Switzerland Sep. UBS Consumption Indicator out at 0.632 vs. 0.623 in Aug.

• Sweden Sep. PPI out at -0.9% MoM and -1.6% YoY vs. -0.5%/-1.5% expected, respectively

• Sweden Sep. Household Lending out at 8.2% YoY vs. 8.0% in Aug.

• UK Oct. CBI Retail Sales Survey out at 8 vs. 3 expected and 3 in Sep.

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Aug. S&P/CaseShiller Composite-20 Home Price Index (1300)

• US Oct. Consumer Confidence (1400)

• US Oct. Richmond Fed Manufacturing Index (1400)

• US Treasury Secretary Geithner to Speak (2000)

• US Weekly API Crude Oil and Product Inventories (2030)

• US Weekly ABC Consumer Confidence (2100)

• Japan Sep. Retail Trade (2350)

• Australia Oct. DEWR Skilled Vacancies (0000)

• Australia Q3 Consumer Prices (0030)

• New Zealand Oct. NBNZ Business Confidence (0200)

• Japan Oct. Small Business Confidence (0500)

Market Comments:

Markets are in a holding pattern ahead of the US open after yesterday's rather strong move in risk aversion. GBP strengthened a fair bit further in the crosses on the stronger than expected CBI retail sales number today, but elsewhere, trading ranges were mostly muted. Broadly speaking, it appears markets are nervously watching to see if this is just yet another dip buying opportunity for risk, or whether a larger consolidation is afoot here. A cross-market barometer for which way this is headed might be the S&P500 level around 1070, which was a clear line in the sand that was crossed yesterday. The kiwi is a shade weaker overnight as PM Key said the kiwi is too strong and that the central bank is not likely to raise rates "this year" as inflation rates are contained. The reaction was probably not larger because "this year" only includes about two more months! The very low Swedish PPI data and risk aversion generally finally put a stopper to the SEK rally for now, as EURSEK consolidated sharply higher.

The market will be watching the US Treasury's 2-year note auction closely today, though as we mentioned yesterday, the demand level for this auction may not be indicative of the demand for the longer duration 5- and 7-year auctions up on tomorrow and Thursday, due to paltry yields at the short end of the curve. JPY crosses will be especially sensitive to moves in interest rates. It would seem that the likes of AUDJPY and NZDJPY ought to be looking at a sharp correction lower in the near term if interest rates simply stay stable, not to mention if they fall sharply. Watch out for Australian Consumer Price Index due out in Asia if considering an AUD trade.

The US house price index is out once again showing year-on-year decline rates slowing and month on month data actually ticking higher, but as we have discussed recently, the risk is of a brick wall next month with the end of the first time home-buying incentive. Bloomberg has an article discussing Goldman Sachs' and Merrill Lynch's view on the situation, with the former's rather dour view on the next year in US housing prices matching our own dim view of where prices are headed in the coming year (lower, but not at great speed) as the artificial stimulus provided by the tax credit and the mortgage backed security QE programs fades away. There are various plans circulating to extend the home-buying tax credit in the US Congress, but these will have far smaller impact than the current plan and only draw out the inevitable demand drop (and mean that those buying houses of late will be guaranteed to see their home prices fall once the program runs out - why not let prices adjust more quickly...?).

Today's two US Consumer Confidence surveys will be interesting to observe. Has the confidence surge peaked out here? Last month's data was extremely confusing, with the Conference Board ticking slightly lower rather than the expected strongly upward expectation, while the University of Michigan data saw a tremendous surge higher. The weekly ABC survey, meanwhile, remains very low due to its correlation with employment and focus on the "current situation" more than expectations.

Chart: USDNOK

It would seem that if we are moving into a bit larger correction mode here, then the likes of NOK might be a higher beta currency and see an especially sharp correction vs. the greenback due to the popularity of carry trades pairing the USD with commodity currencies. A squeeze in the short term could introduce surprising volatility to the upside in the short term. Note the divergent low (lower price on higher momentum reading) and the degree to which the stochastics have turned up lately on the USDNOK chart. JPYNOK might even be a bigger mover if bonds find encouragement after today's US auction results.

Published on  Tue, Oct 27 2009, 14:18 GMT