Intel forecast sparks desperate global rally in risk

Recovery hopes on earnings suddenly burn bright again - will this move fade as quickly as all of the other ones of late?

MAJOR HEADLINES – PREVIOUS SESSION

• US Weekly ABC Consumer Confidence out at -51 as expected and vs. -52 the previous week

• China Jun. Foreign Exchange Reserves rose to $2132 Billion vs. $2022 B expected and $1954 Billion in May

• Australia May Westpac Leading Index fell -0.2% vs. +0.5% in Apr.

• Japan BoJ left target rate unchanged at 0.10% as expected

• Switzerland May Retail Sales fell -1.4% YoY vs. +1.2% in Apr.

• Sweden Jun. Average House Prices rose to 1.878M vs. 1.854M in May

• Norway Jun. Trade Balance out at NOK +22.4B vs. 22.1B in May

• UK Jun. Jobless Claims Change fell to 23.8k vs. 41.3k expected and 30.8k in May

• UK Average Earnings ex Bonus rose 2.6% 3M/YoY as expected and vs. 2.7% in Apr.

• EuroZone Jun. CPI out at +0.2% MoM as expected. Core CPI rose 1.4% YoY vs. 1.5% expected

• Bloomberg's Global Confidence Indicator fell to 39.13 in Jul. after 43.57 in Jun.

• Canada May Manufacturing Shipments fell -6.0% vs. -2.5% expected

• US Jun. CPI out at +0.7% MoM and ex Food and Energy at +0.2% vs. +0.6%/0.1% expected, respectively

• US Jul. Empire Manufacturing out at -0.55 vs. -5.00 expected and -9.41 in Jun.

• US Jun. Industrial Production fell -0.4% MoM vs. -0.6% expected

• US Jun. Capacity Utilization fell to 68.0% vs. 67.9% expected and 68.2% in May

THEMES TO WATCH – UPCOMING SESSION

• US Weekly Crude Oil and Product Inventories (1430)

• US FOMC Minutes from June 24 (1800)

• New Zealand Business PMI (2230)

• New Zealand Q2 Consumer Prices (2245)

• China Q2 GDP (0200)

• China Jun. Purchasing/Producer/Consumer Price Index (0200)

• China Jun. Retail Sales (0200)

• China Jun. Industrial Production (0200)

Market Comments:

The financial world jumped for joy as Intel reported better than expected sales numbers and was even so bold as to make a forecast of future sales and earnings - something it has not done for the last two quarters due to the uncertain times and rapid deceleration in the global economy. The optimists clearly see these results as a symptom of an imminent - or even ongoing - recovery. The more cynical among us note the commentators who point out that the Intel results and forecast may have more to do with low inventory issues and flash in the pan Asian demand from the Chinese stimulus than robust final demand. Regardless, the usual suspects rallied and the other usual suspects sold off on the broad rally in risk. AUD and especially CAD are leading the way, the latter perhaps due to the complacency that developed after weeks of going nowhere.

No matter - it is clear that this market is becoming a bit more emotional and grasping at straws as every tidbit of new information is latched on to with almost emotional intensity. Everyone piles aboard and then the move fades within a day or two. We can only wonder whether this move higher in risk will soon fade as quickly as every other directional attempt of late has done. Alternatively, we could be seeing a "fifth wave" rally in risk that sets up the renewed bear market ahead. Often, the oxygen needs to be sucked out of a market with a sharp rally, which then feeds the severity of a sell-off due to the disappointment and revulsion of those who bought all the way up. Regardless, the USD needs to find support fairly quickly to keep its range intact. The 80 level in the USD index gave way with this latest moves and at 79.40, we're challenging the lowest level in the index since the brief swoon below 79.00 in early June.

To add a couple of reality checks to all of the ebullience, we should note the situation in California, where a new budget deal is finally about to go through after the state has been paying people in IOU's rather than real money for weeks. It will involve heavy cuts in outlays and employees. California is simply at the vanguard of widespread problems with state and local budget crunches. Almost all other states face a similar, if not yet so severe, crunch. An investigation of employment statistics over at the US census website shows almost 15 million people working at the state government and local government levels in full time positions and another 5 million working part time. This is only people directly employed by these governments and doesn't included the implications of budget cuts on institutions that are dependent on public outlays and public employees for their services and products. The self-reinforcing negative cycle of private and the local public sector austerity is still a significant concern despite the frantic attempts by the federal government to grease the economic and credit wheels.

Another background development concern is the longevity of unemployment for many of those out of work and other quirks in the way that unemployment is measured that don't reflect the true situation. The Wall Street Journal (an article by Mortimer Zuckerman - highly recommended reading) was out with an article yesterday describing some of the under-recognized risks in the labor market. These include government assumptions about employment trends that may be untrue and the fact that the many employees on unpaid leave are not counted as unemployed. It also cites the 1.4 million people who were not counted as unemployed simply because they have not officially looked for work in the last four weeks. Long story short, the real unemployment rate, when underemployment is calculated in, will soon be approaching 20%.

China's reserves expanded another 200 billion dollars in June, an absurd amount and remarkable show of discipline and "pain delay", as China continues to defend its peg to the dollar . The expansion certainly has little to do with increasing trade, as China's trade surplus is rapidly diminishing and the US trade deficit is running well under half of what it was at its peak of a few years ago. In Jun.

The UK jobs data was unambiguously strong as recovery signs there are so far more valid than elsewhere, though we wonder how sustainable this development is. In the charts, GBPUSD recently rejected the whole sequence below 1.6200 recently and has rallied to its highest level since July 2. The pair will have to take out 1.6000 again on a structural basis for the technicals to get any bear market credibility.

Chart: EURJPY

Many of the JPY crosses have performed a whiplash throwback rally here that are now threatening key levels. In EURJPY's case, we are looking at the old low around 131.50 and the Ichimoku cloud level slightly higher as the two key resistance levels for now. To maintain solid technical bear market credentials, it would best if EURJPY found resistance here technically. A reversal back below the 130.90 area would help confirm that the bearish scenario is winning out here.