(Reuters) - A string of Europe's largest firms issued surprisingly upbeat profit reports on Thursday, bolstering an abrupt renewal of investor confidence in the region after months of debt turmoil and fears for the euro.
Broader economic data added to the theme, following some startlingly strong numbers last week -- euro zone economic sentiment rose strongly in July and German unemployment fell to its lowest level since November 2008.
Economists said the underlying performance in the region as a whole was never quite as bad as suggested by incessant news of debt default dangers in Greece and other southern European economies badly bruised by the recession of 2008-2009.
But they also cautioned that the abrupt swing toward a more positive mood did not change the fact that the region's economy is likely to heal only slowly with harsh government austerity measures poised to bite in the months ahead.
On the day, the upbeat news from some of Europe's biggest companies was nonetheless impressive and came on the heels of surveys last week which showed an unexpectedly high level of growth in both the manufacturing and services sectors in the region.
Publicis (PUBP.PA), the world's third-largest advertising group in terms of revenues, posted better-than-expected profit figures for the first half, declared its outlook better than previously envisaged, and the company's boss went as far as to declare the bad times over.
"We really have the feeling of being at the end of economic crisis, or even having put it completely behind us," Publicis CEO Maurice Levy told reporters.
His remarks were not isolated.
Dutch staffing firm Randstad (RAND.AS), second largest in the world in its field, said it was not seeing signs of a double dip in the economy, with companies continuing to hire more staff, notably in Germany and France.
"We are seeing growth everywhere. Even in Greece we are seeing the usual pattern. We are not seeing signs of a second dip," Randstad Chief Financial Officer Robert-Jan van de Kraats told Reuters.
Europe's debt market crisis spilled out of Greece late last year when markets took fright at the size of the country's deficit and ballooning debt, knocking the euro and European assets as investors started to fret about the risk of debt default in the region despite a Greek bailout.
Drugs and engineering giants gave good readouts too.
France's Sanofi-Aventis (SASY.PA) beat second-quarter earnings expectations, AstraZeneca (AZN.L) posted strong results and German chemicals maker BASF (BASF.DE) surpassed analysts' earnings expectations for the sixth straight quarter, bolstered by a rebound in the car and electronics industries.
German engineering conglomerate Siemens (SIEGn.DE) posted a better-than-expected 40 percent rise in fiscal third-quarter operating profit, helped by cost cuts and the export fillip from a weaker euro -- an exchange rate advantage ironically spawned by the debt crisis and investor fears that at some stages fueled questions about the common currency's very survival.
That debt market crisis propelled debt refinancing costs to record highs for governments in places such as Portugal, Ireland and Spain in May-June, but they have fallen back sharply in many cases in the last 10 days or so, suggesting investors sense the worst of the danger has passed.
The premium investors demand to hold the 10-year bonds of Ireland and Portugal instead of the equivalent debt of safe-bet Germany has fallen about 18 percent in less than two weeks and markedly too in Spain.
MOOD SWING
All that reflects a suddenly more positive take on Europe as the region additionally gains attractiveness in relative terms for global investors after a string of somewhat disappointing news on the U.S. front in recent weeks.
Investment bank UBS, where economists have long argued that investors were perhaps overly negative about the fiscal woes of the region, published a note that captured the shift in mood as far as they see it.
"Today our Global Strategy team upgraded Europe to Neutral (from Underweight) as they position their portfolio for a more positive tone," said the note.
"We continue to promote Europe on compelling valuations, economic data and relief for the banks to boot," UBS said, noting that Germany's Ifo index of business sentiment registered its biggest leap in 20 years in July, British second-quarter GDP was much stronger than expected and the fact that "stress tests" on banks across the region had proven mostly reassuring.
Other signals that the crisis was petering out include sharp drops in the price of credit default swaps (CDS), which provide protection against debt default and which soared in May.
The Markit iTraxx SovX index of Western European CDS prices is now at 114 bps, 54 basis points below its highest closing level of 168 basis points, seen on May 7.
In addition to a renewed focus on economic activity, signs are that investors are also encouraged by the existence of the 750-billion-euro standby lending facility euro zone governments have put in place to stem debt crisis contagion.
Despite some skepticism, investors also appear reassured by the fact that all but seven banks passed so-called stress tests of their financial resilience [ID:nLDE6661JE]. Bank shares in Europe, as measured by the STOXX Europe 600 bank index .SX7P, are up 7.4 percent since the stress test results emerged on July 23. and 25 percent up from the trough they hit in early June.
NOT SO FAST
At Deutsche Bank, however, economist Gilles Moec warned against getting carried away about the economy's recovery.
"There's no big change in terms of the underlying macro picture: we're in for slow growth," said Moec.
After poor first-quarter GDP figures in much of Europe, the second-quarter is expected to be stronger by definition more than as a result of any major upswing, and government stimulus deployed to combat the recession is still in place, with much of the post-recession austerity yet to come.
Economic growth is expected to be a modest 1.1 this year and 1.3 percent in 2011, according to a Reuters poll of 40 economists that was published in mid-July [ID:nLAG006340]. That follows a GDP drop of 4.1 percent in 2009.
"What is really impressive is the speed at which investors' focus has shifted away from hammering Europe to having a more sober look at the U.S.," said Moec.
A Reuters poll of 15 Europe-based asset managers showed on Thursday that European investors boosted fixed-income allocation to a 2010 high in July, although, as Mauro Ratto, head of Europe and Asia management at Pioneer Investments, put it:
"Concerns about the euro government debt crisis seem to be receding. However, most warning signs are still flashing red ... the prospect of budget tightening is unlikely to improve European growth rates."
(Additional reporting by William James and Jeremy Gaunt in London, Lionel Laurent in Paris and Reuters company news reporters across Europe; Editing by Mike Peacock and Stephen Nisbet)
(Reuters) - Gold steadied on Wednesday after falling 2 percent to a near three-month low the day before, when a bigger-than-expected drop in U.S. consumer confidence and an option expiry prompted heavy selling.
The position adjustment related to expiring COMEX August gold options pushed prices close to a key technical support, where the market was likely to hover before finding fresh clues for direction, traders said.
With increasing market scrutiny on nations' fiscal health and doubts over the effectiveness of ultra-low monetary policies in supporting the economy, governments around the world are facing difficulties finding fresh ways to stimulate the economy and beat deflationary pressures, said Koichiro Kamei, managing director at Tokyo-based researcher Market Strategy Institute Inc.
Expectations for rising inflation as a result of stimulative policies or concerns about a further deterioration in fiscal deficits as a result of more government spending have largely supported gold prices, which hit a record high in late June.
"Reasons supporting investor buying of gold have weakened recently, and options-related technical selling could undermine sentiment in the short-term as investors seek fresh clues for direction," Kamei said.
Spot gold was at $1,161.75 an ounce as of 0536 GMT, up 0.2 percent from late New York levels of $1,159.65 per ounce.
Spot gold could consolidate above $1,157.65 per ounce for a trading session before falling toward $1,140, as a rebound is expected after the previous session's sharp fall, according to Wang Tao, a Reuters market analyst for commodities and energy technicals.
Spot gold fell to a low of $1,157.65 an ounce on Tuesday, the cheapest price since May 5. Bullion also posted its biggest one-day decline since July 1.
Kamei said that the market was close to the support of its 200-day moving average, which on Wednesday stood at around $1,148.
Key events closely watched by investors include the U.S. Beige Book report due later in the day, as well as U.S. monthly jobs data due next week and the U.S. Federal Reserve policy decision next month, Kamei said.
U.S. gold futures for August delivery climbed 0.3 percent to $1,161 per ounce, after settling on COMEX at a three-month low of $1,158 an ounce.
Gold priced in euros and in sterling stayed defensive a day after falling to multi-month lows.
Euro-priced gold was at 893.15 euros after hitting an almost three-month low of 891.25 euros on Tuesday. Sterling-denominated gold briefly fell as low as 743.31 pounds per ounce, a new three-month low.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P), said its holdings fell to 1,300.829 tonnes by July 27, down 0.913 tonnes from the previous business day.
Among other precious metals, spot platinum was at $1,537.50 per ounce, up 0.7 percent from late New York levels of 1,527.15. It stayed near a one-month high of $1,559.50 marked on Tuesday amid caution over supply disruptions.
The National Union of Mineworkers (NUM) of South Africa said on Tuesday that a strike planned for Monday at Impala Platinum (IMPJ.J), the world's No.2 platinum producer, will be delayed to allow further negotiations between management and the union.
(Additional reporting by Risa Maeda; Editing by Joseph Radford)
The substance and meaning of Friday’s Stress test results are still be hotly debated. Financial pundits are putting enormous emphasis on the European open as the barometer of the market’s sudden confidence in the results. We are still unconvinced about the stress tests and doubt that a single market open/trading day will create the directional rush some participants are looking for. FX markets initially took on risk in Asia but the gains were quickly eroded.
Seven of the EU banks, out of a total of 91, failed the stress test. The test did not find any troubled institutions in countries such as Italy and Portugal and just one in Greece. Of the banks that did fail, they only needed to 3 million Euros to meet their Tier-1 capital ratio of 6%, quite a low figure for major banks. The EU’s widespread denial of the possibility of a sovereign default is vexing to analysts, but it’s understandable from a political and market stability standpoint.
Overall, if the purpose of this test was to gauge the probability of a sudden bank collapse in the EU, than it misses the mark. We maintain the view that Europe’s problems are largely structural and thus no test will address these problems. The macroeconomic assumptions used in the adverse scenarios were not very difficult nor believable. Ireland’s GDP growing 1% is not an emergency scenario.
Markets will continue to watch LIBOR and credit-default swap spreads carefully as well as the equity markets’ reactions – especially to see which banks come under heavy selling pressure.
The Euro’s strength is limited as domestic growth prospects will diminish as the austerity measures kick in. Global growth is still decelerating and the credibility of the single currency has been damaged in recent years. In addition, we have our eye on the Swiss Franc to outperform across the board. The Swiss version of the stress test, released Friday prior to the EU test, was more rigorous and comprehensive. With the added scrutiny, market participants can be confident in Switzerland’s banking sector. We suspect capital will continue to flow from Europe, into Switzerland, as investors seek out a safe haven for their assets.
We are still very impressed with the UK growth figures released last Friday. Q2 GDP figures came in well ahead of expectations at 1.1% q/q and 1.6% y/y, ahead of the 0.6% q/q & 1.1% y/y expectations. While PMC member Posen has raised the question of further QE to prevent the UK’s economy from taking another dip, we are leaning more to the views of Sentence that inflationary pressure needs to be tackled now. We will be watching for the opportunity to go Long sterling, especially in the EURGBP.
Today’s final thought is on the Yen. There has been a noticeable lack of rhetoric surrounding its recent strength. The current government coalition believes that markets themselves should set prices, even though there has been no noticeable erosion in exports (June exports increased a whopping 27.7% y/y). This week’s June CPI will be in negative territory and we believe it’s only a matter of time until Japanese rhetoric begins and we see the Yen lose ground.
Today's Key Issues (time in GMT): 07:30 SEK Jun trade balance; last SEK2.7 bln surplus. 07:30 GBP Details of UK financial supervision reform. 14:00 USD Jun new home sales, 335k AR eyed; last 300k. 00:00 PLN Interest rate announcement, % 3.50 exp/prior
EurUsd Well, the European stress tests were just as underwhelming as expected, so for now EURUSD’s short-term uptrend remains intact and the markets look pretty directionless this Monday morning. Our gut instinct is that the medium-term direction for this pair will be lower, but in the short-term we would be willing to play this one either way depending on the outcome of a potential symmetrical triangle pattern now visible on the hourly chart. The lower edge of the triangle coincides with the short-term uptrend line, so a break below that support (currently 1.2825) would be the signal to go short with a target below around 1.2480. Given that target is some distance away, supports on the downside are a potential hazard at 1.2793 (Friday’s low),1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). Should the bullish triangle scenario play out instead then we need a break above 1.2950 to trigger long entry, and eye a target above at 1.3300. Next resistance is expected at the 100-day moving average 1.2874, 1.3028 (20 Jul high) and 1.3093 (10 May high).
GbpUsd After the false break of the 6-week uptrend last week GBPUSD has bounced emphatically higher, and impressive UK GDP figures on Friday has catalysed the rally further to highs of 1.5501. In doing so, the pair has now surpassed the 15 Jul highs at 1.5472 and is now expected to make a move on the more significant 1.5525 (15 Apr high). Above there lies yet more technical resistance (namely the 200-day moving average 1.5558 and 23 Feb high 1.5575) which should stall the rally on the first visit, but beyond there the skies are clear for a run on 1.6000. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080.
UsdJpy The bearish flag pattern we had been tracking last week has now decisively been dead and buried by the move back above 87.50, and if anything we look to be carving out a range between 86.25 –87.75. At current levels towards the upper end of the range, the most attractive strategy is to sell some and await a return to 86.50ish levels, but ensuring we keep a tight stop on the topside to keep the risk/reward ratio manageable. There is a possibility that from here, a break above that range ceiling (87.75) could indicate a double bottom chart pattern has been activated, and if so, we should be getting long there and aiming for a target above of 88.85.Sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf Finally, someone told the bulls about the break of the 3-week downtrend channel and we managed to get a bullish engulfing candlestick pattern on the daily chart to finish the week; it only took about 3 days... The decisive burst higher on Friday afternoon hit a peak of 1.0564 but progress has been halted by resistance coinciding with the 19 Jul highs, so for now the pair is now consolidating above 1.0500. We see a potential bullish flag pattern on the hourly chart that suggests a break above 1.0560 should be taken as the signal to go long, with a target on the topside around 1.0715; however we think buying on a dip to 1.0500 (the lower edge of the flag) also represents decent value with 1.0450 likely to offer some protection below. Only resistance levels above to be wary of are the 14 Jul highs at 1.0618 and the 200-day moving average at 1.0640.
(Reuters) - The euro erased early gains against the dollar on Monday as caution set in after initial investor calm in the wake of the release of European banks' stress test results late on Friday.
Early risk-taking sentiment faded, with European shares down 0.4 percent .FTEU3 by mid-morning.
Just seven of 91 banks failed the tests, including six in Spain and Greece, for an overall capital shortfall of 3.5 billion euros.
"Any downside lurch has been prevented by the generally reassuring conclusions of the tests ... no surprises as to the vulnerabilities, and no real headache in terms of the required capitalization to bolster their position," said Daragh Maher, deputy head of FX strategy at Credit Agricole CIB.
"At the same time, any relief rally for the euro has been curtailed by inevitable criticism about some of the deficiencies of the stress test assumptions."
By 4:44 a.m. ET, the euro was flat compared with late U.S. trade on Friday at $1.2900, falling from a session high of $1.2958.
He added the euro may make a push toward $1.3125, the 38.2 percent retracement of the December to June move, but a rise to that level would attract reversal plays in the pair.
Near-term support was seen around $1.2870, its 100-day moving average.
Some said the euro's gains could be restricted by this week's redemption of maturing euro zone bonds and coupon payments worth some 45 billion euros, according to Citi estimates.
The euro hit a 10-week high above $1.30 last week, recovering after fears of a euro zone debt crisis and its impact on European banks drove it below $1.19 in early June.
Brighter economic data in the euro zone also bolstered the single currency.
Data from the Commodity Futures Trading Commission showed currency speculators cutting net short positions in the euro. Net shorts fell to 24,251 contracts in the week to July 20 compared with 27,050 in the prior week..
YEN GAINS
The yen gained broadly as investors stepped back from risk-taking.
The euro hit a seven-week high of 113.49 yen as dealers unwound long yen positions, but then ran into offers from Japanese exporters around 113.30/50 yen which took it lower. It was last down 0.3 percent at 112.50 yen.
That helped pull the dollar down 0.3 percent against the yen to 87.16 yen.
The dollar was expected to remain under pressure after recent U.S. housing and manufacturing data suggested recovery may be fizzling out. Economists have steadily marked down forecasts for Friday's U.S. second quarter gross domestic product.
"The dollar will remain weak on the back of weaker U.S. economic data and on the lack of a credit event," said Hans Redeker, global head of FX strategy at BNP Paribas, he said.
The dollar index was flat at 82.50 .DXY.
The Australian dollar came off fresh 10-week high of $0.8990, while sterling also failed to hold a three-month high of $1.5502.
A decline in US 3-month libor below 0.50% coupled with solid Q2 company earnings have buoyed demand for carry trade strategies, driving high yielding and commodity currencies through key resistance levels vs the USD. It is debateable how long momentum can be sustained in a context of faltering momentum in the US. The idea that additional policy stimulus by the Fed could be required and would re-flate risk assets appears misplaced when elsewhere fiscal stimulus is withdrawn and liquidity is unwound. With the EU bank stress tests finally behind us, we look ahead to a G10 calendar next week dominated by the MPC testimony to the TSC and the first estimates of US Q2 GDP. Month-end implies currency and bond portfolio rebalancing. In five of the last six months, the re-weighting resulted in EUR/USD firming an average 0.5%. In contrast, GBP/USD only gained in month-end fixings in March and May.
Recap
The recap for fx this week reads very similar to that of two weeks ago. A rally in global equities propelled the AUD to the top of the G10 table, helping the currency to gains of 3.3% vs EUR, 2.6% vs USD and 2.5% vs GBP. A 1.1% q/q jump in UK Q2 GDP boosted GBP and helped the pound to record a 1.3% gain vs the JPY and 1.2% vs the EUR. GBP/USD ended the week above 1.5350, having traded as high as 1.5450. EUR/USD was equally unable to cling on to the best levels above 1.29 as profit taking emerged on the release of the EU bank stress tests following earlier bidding on a 3-year high for the German IFO.
UK Q2 GDP surpassed the most bullish estimates as the ONS reported a 1.1% q/q jump in output vs 0.3% in Q1. This still leaves the economy 4.7% below the starting pointof the recession in 2008, and will not tempt the MPC to change its view that the economy may weaken in the second half of 2010. The MPC minutes were remarkably more dovish on growth and members Posen and Dale did not hold back to warn of the dangers ahead. Retail sales also beat consensus estimates by climbing 1% in June. A marked decline in the retail deflator to 1.3% and a fall in inflation expectations back below 3% will comfort the MPC about the inflation outlook. Public finances recorded a bigger deficit in June, with borrowing reaching £14.5bln and data for May revised up to £17.0bln.
A good start to the week for UK rates reversed on Friday on the strong GDP release, causing yields to end the week on a high. 5y swaps climbed to 2.47%, up 6bp on the week. 10y yields rose above 3.40% to a 3.43% high. A deceleration in inflation pressures should keep yields capped going into August, with downside risk to the US macro data providing better levels to buy. The 3mth Libor/Ois spread widened one bp to 24bp. The 2y/10y swap spread widened 2bp to 198bp, and 10y swap spreads stayed flat at 2bp. A disappointing 2016 gilt sale drew lower than previous cover of 1.38x (1bp tail) .
G10 FX - GBP/USD, ST Trend Still Bullish
Back in June we noted that by flirting with a return to the 1.4784- 1.55 trading range in place between February and May, GBP/ USD had approached a crossroads, and how an improved technical picture and a rebound in correlations with equities and commodities pointed to further upside in the short-term (1.54 topside). This week we review our call and state that even though GBP/USD has posted impressive gains in July, there is no compelling case to drop the bullish near-term picture. Though the correlation of GBP/USD has eased back to statistically insignificant levels since the June comment (see chart), the divergence between UK and US macro indicators (see chart) brings the potential of further upside over the coming weeks before potential profit taking sets in ahead of the August MPC meeting and the Inflation Report on August 11.
The retreat of USD crosses since June has been led by a net change in speculative positioning and is marked by a net reduction in short JPY, EUR and GBP contracts. Disappointing US macro data since June has added downside USD pressure and is fuelling talk that the Fed may engage in a new round of policy stimulus in Q3/Q4 to prevent the economy from losing further steam. Though the jury is out whether the Q2 slowdown is a blip or start of a downtrend, a decline in US 3-mth libor below 0.50% and a rally in short-dated FF futures curve indicates that the market is taking a more pessimistic view. Additional US measures would threaten to drag the USD lower vs non-QE currencies or currencies where exceptional measures are gradually phased out.
Though strong UK Q2 GDP (+1.1% q/q) took the market off guard and lifted GBP/USD above 1.54, one cannot ignore the dovish observations by the MPC and individual comments by members Posen and Dale. This could lead investors to re-engage in accumulating GBP short positions into early August. To what extent the Budget will bear down on the Bank's growth and inflation forecasts will become clear in the next Inflation Report. Minutes from the July MPC meeting hint that growth prospects may be scaled back. Depending on whether inflation and inflation expectations also recede, talk of additional policy loosening (a greater than 50% probability accordng to MPC member Posen) would cloud the outlook for GBP vs other G10 currencies, especially those where performance is linked to positive interest rate spreads and elevated correlation with equities and commodities.
Based on our quantitative metrics, the correlation of GBP/USD with risk assets has receded markedly to the point that price action in stocks has become statistically insignificant for short term direction. Rate differentials between the US and the UK have also faded as a driver for GBP/USD, offering no clear sense of direction for the cross. Though we are tracking changes in correlations closely, this means is that markets are inclined to put more weight at present on corporate flows and a divergence between US and UK macro indicators, but with confidence about deficit reduction equally playing a part.
Technically, to sustain the upward short-term move GBP/USD has to overcome 1.5454, the July 15 high. Beyond 1.55 lies a cluster of resistance at 1.5524 and 1.5578. A breakout of the February- May range would bring 1.5814 into play.
(Reuters) - The Obama administration warned on Friday the U.S. economy had encountered "strong headwinds" and the country's fiscal challenge remained grim, but it lowered an estimate for the budget deficit this year.
Outlining the country's fiscal path over the next decade, the White House said the numbers were moving in the right direction but the deficit and debt were too high.
"The economy is still struggling; too many Americans are still out of work; and the nation's long-term fiscal trajectory is unsustainable," the White House said in the annual midsession review of President Barack Obama's budget.
Polls show Americans are anxious about the economy and could punish Obama's Democrats in November 2 midterm congressional elections for perceptions of big government spending and high unemployment after a severe recession.
Investors are also focused on U.S. debt at a time when European governments are stressing fiscal consolidation. The White House said the country was on track to meet its June commitment in Toronto to the Group of 20 to halve the deficit by 2013.
The administration trimmed an expected funding gap in the current fiscal year by $84 billion, to $1.47 trillion, versus the estimate released in February. The gap was seen narrowing to $1.42 trillion in 2011.
Republicans jumped on the numbers as proof "Obamanomics" was not working.
"This report confirms that our national debt will double in five years and triple in 10 years. It confirms that our deficits are not sustainable," U.S. House of Representatives Republican Leader John Boehner said in a statement.
The review also tweaked White House assumptions about the economy, which have been criticized as overly optimistic in the past. The White House forecast growth at 3.2 percent this year, 3.6 percent in 2011 and 4.2 percent in 2012.
Unemployment will only decline slowly, to 8.1 percent in 2012, the year of next presidential election, and stay above 6 percent until 2015.
The forecasts were based on data available through May and finalized in early June.
"The most pressing danger we now face is unacceptably weak growth and persistent unemployment, rather than outright economic collapse, and that is a very substantial difference," White House Budget Director Peter Orszag told reporters.
Job creation is a vital goal for Obama and will loom large in the November poll, but unemployment has lagged growth and remains at a lofty 9.5 percent.
EUROPEAN RISKS
"The U.S. economy still faces strong headwinds," the White House said, citing a weak housing market and doubts about the recovery in Europe, which could sap demand for exports.
"The European recovery is at risk because of increased uncertainty while government stimulus is withdrawn, and a further slowdown in Europe would pose problems for the rest of the world whose exports to Europe may be reduced," it said.
Britain and Germany have announced austerity plans to reassure investors, contrasting with the U.S. preference of phasing in budget controls going forward.
European Central Bank President Jean-Claude Trichet, in an article in the Financial Times on Friday, urged countries using the common euro currency to "implement a credible medium-term fiscal consolidation strategy."
In contrast, Federal Reserve Chairman Ben Bernanke argued this week the economy still needed fiscal support and it did not make sense to try to rein in this year's deficit.
But he stressed the country needs to curb the deficit over the next 2 to 3 years.
Obama signed an $862 billion emergency stimulus last year, which the White House says helped restore U.S. growth. But his subsequent efforts to increase aid to cash-strapped states and small businesses have been thwarted in Congress, mainly by Republicans in the Senate objecting to more deficit spending.
U.S. government debt held by the public is projected to rise above 70 percent of gross domestic product in 2012 and reach 77 percent by 2020.
Critics warn adding to the deficit could sap investor faith in the administration's commitment to phase in budget controls, risking a sovereign debt crisis here that unnerved European markets earlier this year.
Long-term U.S. interest rates have stayed low despite the grim U.S. budget outlook, supporting the recovery by holding down borrowing costs on mortgages and auto loans. But that could quickly change if bond investors take fright.
Obama vows to halve the deficit by 2013, a promise the larger Group of 20 rich and emerging nations also adopted at a meeting in Toronto last month, and the president has appointed a bipartisan commission to suggest how to tackle the fiscal challenge.
Obama's 18-strong panel is expected to recommend a mixture of spending cuts and tax increases when it reports findings by the end of December, well after the congressional vote.
(Reporting by Alister Bull; Editing by Andrew Hay and Dan Grebler)
The amount of nervous energy in today’s FX market has already translated into some choppy, range-bound trading. The source is obviously the impending release of the EU bank stress test due to be issued at 16:00 GMT.
Today, German IFO data came in much stronger than expected spiking the EURUSD 40 pips rallying up to 1.2965. In the back of our minds, we remember that torrent of support risk-correlated trades gained on the release of the US stress test despite the market’s criticism then. Nevertheless, we remain unconvinced that today’s risk appetite will receive the same boost.
The EU stress test lacks the rigor of the US test and has lost enormous credibility based on the handling of the assignment. Swiss regulators highlighted this fact when the FT reported that they had conducted their own bank stress tests which were twice as stringent. The FT reported that the Swiss regulators conducted 13 different mega-risk scenarios including the collapse of the credit market and a drastic fall in GDP. I would suspect that investors will look at the Swiss test and feel kind of slighted when the actual EU tests & methodology are released.
As we have yet to see the actual report, the assumptions we’re making are based solely off official statements and newswires, thus we may be proved incorrect. The most important factors for the release will be the credibility of the results, the transparency of information and the explanation of all assumptions made during the research.
According to the most recent reports, all vital banks (read: too big to fail) will pass including Germany’s Landesbanken and all Greek banks. If all Greek banks are set to pass this test, something must be awry somewhere. To create the illusion of authenticity, the EU may throw a few minor banks under the bus. There are still significant EURUSD shorts lingering in the market and if the report is truly first-rate, we could see some heavy short covering and quickly.
In the UK this morning, the Office for National Statistics released their first estimate for Q2 GDP. The numbers came in much stronger than expected at +1.6%, exceeding the +1.1% consensus among economists and a -0.2% previous reading. The surprise number significantly decreases the probability of further QE by the BoE. Although an entire strategy cannot be based off one data point, the BoE’s MPC will most likely focus more on inflation and less on growth in future meetings. Perhaps Mr. Sentence, the lone dissenter in the last meeting, may not have been too far off base after all.
Finally, the ECB’s Trichet suggested that fiscal tighten was necessary around the globe and should not be delayed. The comment is in direct contrast to the Fed’s view that some level of stimulus was still required, a point just reiterated by Bernanke this week. We don’t expect any reaction in the USD, but it will be interesting to monitor because strict fiscal policy compounded by loose monetary policy should be extremely supportive for the underlying currency.
Today's Key Issues (time in GMT): 07:30 EUR ITA Jul consumer confidence index, 103.9 exp; last 104.4. 08:00 EUR GER Jul Ifo sentiment index, 101.6 exp; last 101.8. 08:00 EUR GER Jul Ifo current conditions index, 101.7 exp; last 101.1. 08:00 EUR GER Jul Ifo expectations index, 101.6 exp; last 102.4. 08:00 EUR ITA May retail sales; last -0.3% m/m, -0.5% y/y. 08:30 GBP Q2 GDP - prelim, +0.6% q/q, +1.1% y/y exp; last +0.3%, -0.2%. 08:30 GBP Jun BBA mortgage lending data 16:00 EUR Stress Test results for individual banks expected start 17:00 EUR CEBS press conference regarding Stress Test results
EurUsd We may have written EURUSD off prematurely yesterday as our short trade at 1.2790 was thwarted by the bulls managing to break back within the 4-week uptrend channel. Fortunately, leaving a tight stop just above the trendline around 1.2830 shielded us from being dragged all the way back up to 1.2933 highs, but it has somewhat dented conviction in our short-term bearish view (the medium-term bearish view still prevails). Not only does the break back inside the uptrend signal that the bulls are not quite done, but there is also a bullish engulfing candlestick on the daily chart which also suggests the bears are lacking the energy to do much about it at the moment. We are currently toying with the 100-day moving average at 1.2881 but next resistance levels on the topside are expected at 1.2933 (yesterday’s peak), 1.3028 (20 Jul high) and 1.3093 (10 May high). The lower edge of the 4-week uptrend now comes in at 1.2830, but should there be another break below there we would once again attempt a short with a view to re-visiting 1.2733 (yesterday’s low), and 1.2683 (14 Jul low) in extension.
GbpUsd Yet another currency pair to give us the head-fake this week, GBPUSD’s break below its 6-week uptrend touched a low of 1.5125 before rebounding sharply back up towards 1.5350 resistance (19 Jul high). This 1.5350 level still poses a difficult challenge for the bulls to overcome, especially as 1-week downtrend channel resistance comes in just ahead of there at 1.5340; but should they manage to push it higher then look for next resistance up at 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Next support is that lower edge of the 6-week uptrend at 1.5250; but if the trend breaks lower once more then first stop on the downside will be 1.5125 (Wednesday’s low), followed by 1.5080. Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949.
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past few sessions, but the bulls failed to capitalize on the upside break and the pair is has since tumbled back towards major support at 1.0400. Until we get a decisive break out one way or another –either below 1.0400 or above the downtrend resistance 1.0470 –we are likely to be confined to achingly tight ranges. Those who favour buying on dips should only do so around 1.0400, as the landscape below 1.0400 is dotted only with stale support levels at 1.0365 and 1.0230. Sellers are likely to step in back up towards 1.0450 former pivot, aforementioned downtrend channel resistance at 1.0470, then 1.0560 (19 Jul ) highs.
The Euro managed to erase most of its weekly losses against the Dollar yesterday, as investors expect bank test results to show that the Euro-Zone's condition is stabile. The market waits to hear that the Euro-Zone's debt crisis is not a threat to the region's stability. Will the Euro strengthen following the test results?
Economic News
USD - Bernanke's Testimony to Weaken the Dollar The Dollar slid against most of the major currencies during yesterday's trading. The Dollar lost about 180 pips against the Euro today as the EUR/USD reached above the 1.2900 level once again. The Dollar also saw a 150 pips drop against the Pound.
The Dollar's bearish trend came as a result of Fed's Chairman Bernanke's testimony before the House Financial Services Committee. Bernanke stated that there is an unusually uncertain outlook for growth, yet he added that the Fed's near zero interest rates are already very simulative. He also added that if the recovery seems to be faltering, the Fed will consider different alternatives, such as lowering borrowing costs. It seems that investors expected the Fed Chairman to have a more proactive approach, as several economic data that were published during the last month have shown that the U.S. economic recovery isn't progressing as well as expected.
In addition, while Bernanke has delivered his speech, the Department of Labor has released the weekly Unemployment Claims data. The report showed that jobless claims in the U.S. have increased by 37,000 to 464,000, beating expectations for merely 449,000 claims. The combination of Bernanke's speech along with the poor employment data has weakened the Dollar against most of its major counterparts.
As for today, traders are advised to follow U.S. equity markets as they have a large correlation with Dollar's trading. Traders should also follow the European Bank Stress Test Results, which will be released tomorrow. The results might have a significant impact on thee major currencies, and traders should be prepared.
EUR - The Euro Soars Following Positive Economic Data from the Euro-Zone The Euro strengthened against all the major currencies during yesterday's trading session. The Euro gained about 180 pips against the Dollar, about 100 pips vs. the Pound, and about 250 pips against the Yen.
The Euro's strengthened against its major rivals as several positive economic reports were published. The German Flash Manufacturing Purchasing Managers' Index rose to 61.2 in July, from 58.4 on June. It is a survey of about 600 purchasing managers, who are asked to rate their level of business conditions. In addition, the European Industrial New Orders rose by 3.8% during May, beating expectations for a 0.1% drop. The report also showed that compared to the same month last year, industrial sales rose by 22.7%. The Euro-Zone's economic condition is considered to be somewhat fragile due to the high debts of several European nations. As a result, the batch of positive data has a significant affect on the Euro. Investors are looking for reasons to believe that the Euro-Zone is recovering and such positive reports are all they can ask for.
Looking ahead to today, many interesting publications are expected from the Euro-Zone. First of all will be the German Business Climate report. This is a survey of about 7,000 businesses, who are asked to rate their current business conditions and expectations for the next 6 months. The survey is expected to remain at its high level above 101. In addition, the Euro-Zone's Bank Stress Test Results are due today. The results are expected to reveal the European banks' stability, and whether the capital reserves are sufficient. Positive report will further support the Euro, however if the results won't be as satisfying as expected, the Euro might erase yesterday's profits.
JPY - Yen Drops On All Fronts The Yen fell against mot of its major rivals during yesterday's trading session. The Yen dropped about 100 pips against the Dollar, and about 250 pips against the Euro. The Yen also slid 200 pips against the British Pound.
The Yen tumbled yesterday on speculations that the Japanese leadership is looking to weaken the national currency in order to stimulus economic growth. The Japanese press is reporting that the government will pressure the Bank of Japan to take more steps to support the economy. The Japanese economy relies greatly on its exporting, and a weaker Yen will support Japanese exporters. In addition, the current instability in Japanese politics is damaging the Yen's safe-haven image, and as a result the currency seems less appealing in times of uncertainty.
As for today, traders are advised to follow the major publications from the U.S. and the Euro-Zone, as they tend to have a large impact on the Yen. Special attention should be given to the Euro-Zone's Bank Stress Test Results, which appears to be the news even which will have the largest affect ion the market today.
Crude Oil - Crude Oil Reached Above $79 a Barrel Crude oil rose over $79 a barrel for the first time in nearly 11 weeks. Crude oil began yesterday's trading session around $76.40 a barrel, and gained about 300 pips in a single day, to peak at the $79.40 price.
Crude oil rallied yesterday following notifications that EBay Inc. and Caterpillar Inc. saw higher earnings than expected during the last quarter. In addition, several positive economic reports were published from the Euro-Zone yesterday, suggesting that energy demand in Europe will recover soon. Another support for crude oil prices was the Dollar's bearish trend against most of the major currencies. Crude oil is traded in Dollars, and thus when the greenback weakens, oil prices tend to rise as a result.
As for today, traders are advised to follow equity markets in the U.S. as they tend to be highly correlated with crude oil trading. In addition, traders should take notice of the Euro-Zone's Bank Stress Test Results. The results are expected to reveal the region's banks stability in light of the high debts of several European nations. This report might impact global trading, and traders should be prepared.
Technical News
EUR/USD The pair has recorded much bullish behavior yesterday. However, the technical data indicates that this trend may reverse anytime soon. For example, the 4-hour chart's Stochastic Slow signals that a bearish reversal is imminent. . Going short with tight stops might be a wise choice.
GBP/USD The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, there is a bearish cross forming on the 4-hour chart's Slow Stochastic indicating a bearish correction might take place in the nearest future. When the downward breach occurs, going short with tight stops appears to be preferable strategy.
USD/JPY The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.
USD/CHF The cross has been dropping for the past several days now, as it now stands at the 1.0430 level. However, the 4-hour Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long with tight stops may turn out to be the right choice today.
The Wild Card Crude Oil Crude Oil prices rose significantly yesterday and peaked at $79.20 per barrel. However, there is a bearish cross on the 4-hour chart's Slow Stochastic suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.
(Reuters) - The euro hovered near a 10-week high against the dollar on Wednesday, supported by strong U.S. corporate earnings that also boosted global shares.
The dollar was on the back foot, slipping against a currency basket and coming under selling pressure versus the yen as Japanese exporters sold the U.S. currency.
The euro moved in narrow ranges as investors awaited testimony from Federal Reserve Chairman Ben Bernanke later in the day and looked for fresh factors to extend the single currency's corrective rally.
"People are less worried about the euro than they were a month or two months ago," said Johan Javeus, head of global strategy at SEB in Stockholm.
He said signs of weakness in the U.S. economy and receding worries about euro zone public finances helped to support the euro in holiday-thinned trade.
"But the market doesn't know which foot to stand on. It's not extreme risk aversion or risk demand," he added.
Bernanke gives his semi-annual testimony on the economy and monetary policy at 1800 GMT. After a run of weak U.S. data, investors waited to see if his statement would boost speculation the Fed may offer more monetary accommodation.
By 0747 GMT (3:47 a.m. EDT), the euro was 0.1 percent higher on the day at $1.2895, having pulled back from $1.3029 hit on Tuesday, its strongest since May 10.
Traders said the euro may struggle to make gains in the near term as investors take profits on a rally which has taken it up more than 8 percent since hitting a 4-year low of $1.1876 in early June.
But there was also talk of bids in the euro at $1.2860/65 and then at $1.2820, with a mixture of stop-loss sell orders and bids then expected around $1.2780/2800.
Analysts said euro movements may be limited before the results of bank stress test are announced on Friday. Some said the results may soothe concerns about how European banks would cope with a deterioration in the region's economy.
YEN GAINS
The euro was also supported by a 1.4 percent rise in European shares .FTEU3, after strong results from Apple (AAPL.O) raised optimism that the second half of the U.S. second-quarter earnings season would be better than expected.
This helped prod the dollar .DXY 0.2 percent lower against a currency basket to 82.575.
The dollar slipped 0.4 percent to 87.14 yen, as Japanese exporters lowered their offers after the currency hit a seven-month trough of 86.27 yen on EBS late last week.
The dollar is struggling as expectations for a Fed rate rise in 2011 fade, while speculation of more easing has risen after weak U.S. data. Figures on Tuesday showed a bigger-than-expected fall in June U.S. housing starts.
The two-year U.S. Treasury note yield hit a record low of 0.57 percent on Tuesday, about 20 basis points less than the yield on two-year German bonds.
Until less than a month ago, U.S. notes yielded more than German debt. Some analysts say the reversal has spurred buying in the euro.
With interest rate differentials playing a key role in currency markets, Bernanke's comments could set the tone of the markets in coming weeks, traders said.
"Bernanke could hint at further monetary policy easing, although the possibility of actually relaxing the Fed's policy is nearly zero," said Hideki Hayashi, global economist at Mizuho Securities in Tokyo.
He added that such an indication may warm risk appetite and boost share prices, while adding it was difficult to predict whether this would add to dollar weakness.
(Additional reporting by Tokyo Forex Team, editing by Nigel Stephenson)
(Reuters) - This earnings season, good profits are not enough. Investors have been punishing companies with disappointing revenues in a sign of growing trepidation about the health of the U.S. economy.
Some investors are concerned that falling revenues at some bellwether companies are consistent with data showing that the economy began slowing in the second quarter and is starting to become a drag on corporations.
The bottom lines of U.S. corporations haven't been all bad. About a tenth of S&P 500 .SPX have reported so far and of those, over 70 percent have beat earnings estimates, while 65 percent have trumped revenue expectations, according to data from Thomson Reuters through early Tuesday.
But the S&P 500 has struggled to make progress since reporting season got into full swing a little over a week ago with a strong set of numbers from Alcoa Inc (AA.N), as revenue misses at some big corporations grabbed the headlines.
"I think it's a real worry," said Christian Thwaites, chief executive at Sentinel Asset Management in New York. "The real story is that underlying final end real demand is weak here, which is what we've been seeing in the macroeconomic numbers for some time."
After stocks soared in 2009 as corporate management beat earnings forecast by cutting costs, investors are now demanding their pound of flesh in the form of top-line revenue growth. Shares of companies that don't oblige are getting hit hard.
Results from banks have been a concern. Two of the nation's largest, Citigroup (C.N) and Bank of America (BAC.N), reported a sequential fall in revenues along with declining demand for loans, a sign that economic activity is sluggish.
Bank of America's shares plummeted more than 9 percent after its results on Friday while Citigroup shed 6 percent. Since then, the BKW Bank .BKX index, which tracks the performance of 24 leading U.S. banks, has dropped 6 percent.
The problem is not limited to the financial sector. Shares in General Electric Co (GE.N), a huge industrial conglomerate, fell nearly 5 percent after revenues dropped, even as it posted its first quarterly profit increase in more than two years.
STOCK PICKERS' MARKET
The prospect of an uneven recovery at best, and a double-dip recession at worst, is likely to favor careful stock pickers. Last year almost any buy-and-hold strategy worked as markets rallied off their lows. This year it's not so easy.
Tom Forester, a portfolio manager at the Forester Value Fund in Lake Forest, Illinois, has been protecting his portfolio by buying S&P 500 put options and selling stocks in economically sensitive sectors such as materials and energy.
"People are a little concerned that growth is slowing and you can't (cost-) cut your way to prosperity," said Forester, who said he liked stocks in the healthcare sector as well as stable revenue companies that pay a dividend.
The S&P 500 is down 2.8 percent since the beginning of the year and is now trading at about 12 times earnings, according to the smart estimate from Thomson Reuters Starmine. Investors who pick the right stocks at those kind of valuations could end up taking home bargains.
David Joy, chief market strategist at Columbia Management in Minneapolis, said that certain financial and technology companies are still good buys and, bar a double-dip recession, cheap valuations should keep investors interested.
"We're upgrading the quality of our portfolios across the board, looking for sustainable earnings growers over time, companies that really take advantage of the environment and distance themselves from the competition," said Joy.
Examples of those are Intel Corp (INTC.O), whose margin and revenue forecasts breezed past forecasts, sending its shares up around 2 percent, and Apple Inc (AAPL.O), which gained around 3 percent after handily topping expectations on both revenue and earnings.
ECONOMY A HEADWIND
Despite the occasional bright spots, Joy says earnings estimates for next year will have to be lowered as the economy slows and corporations struggle.
"Maybe now you have to start rethinking what had been optimistic earnings forecasts for the second half of this year and for 2011. By and large, we think 2011 forecasts are just not realistic, and they need to come down," he said.
Early indicators suggest both the U.S. manufacturing and services sectors started to slow in the second quarter. Signs of a slowdown while employment is still anemic are a concern to investors worried that consumer spending won't be able to sustain the recovery.
Government stimulus and inventory rebuilding by companies, which helped fire an initial bounce, are coming to an end. That combined with the prospect of slowing growth in the euro zone and monetary tightening in China is also worrying investors.
Trading volume in the equity market continues to be anemic during the summer and investors have had a rough ride in the last few months, with fears over the economy, financial regulation and BP Plc's (BP.L) (BP.N) oil spill hitting sentiment.
With the U.S. midterm elections in November, many are taking a wait-and-see approach until later in the year, with tax policy representing another wild card for markets.
That could make for a frenetic finish to 2010, especially with some prominent sell side analysts maintaining year-end S&P 500 forecasts that imply a 20 percent rally by year's end.
(Additional reporting by Herb Lash; Editing by Eric Walsh)
For the moment, anyways, the EUR continues to enjoy the spotlight while the market awaits the results of the recent stress tests. Risk appetite in the market has surged from a wave of optimism. A number of analysts have been concerned about the EUR's sudden surge, however, since there is little to support such movement. European debt concerns remain, growth continues to lag behind expectations, and the bank stress test results are due this Friday which may reveal just how bad off the region is financially. Economic News
USD - US Dollar under Pressure from Slow Growth The US Dollar continues its decline against the other major world currencies. Concerns have been raised these past few weeks that the US economy is not recovering as quickly as previously anticipated. The decrease in expectations has put a damper on US investments and brought the USD down somewhat.
Against its primary rival, the EUR, the greenback has experienced gradual declines to a current price level of 1.2900. Against the Japanese Yen, the greenback has actually fallen to a 7-month low near the 87.00 price mark. The buck doesn't appear to be fairing too well against the British Pound or Swiss Franc either.
Concerns about slowing economic growth may have increased with Tuesday's housing reports, but today is expected to be a light news day. So long as market events continue to be ineffective at changing trends, the USD will continue its slide against the other major currencies.
EUR - Is EUR Rising Too Quickly before Stress Test Results? The EUR has experienced irregular optimistic movements these past several weeks. Despite a string of negative news releases, the 16-nation single currency continues to make gains on rising risk appetite. Some of the largest gains have been made against the US Dollar and Japanese Yen. The EUR/USD has risen steadily in value and currently trades at 1.2900, while the EUR/GBP sits at a present value of 0.8445.
A number of analysts have been concerned about the EUR's sudden surge since there is little to support such movement. European debt concerns remain, growth continues to lag behind expectations, and the bank stress test results are due this Friday which may reveal just how bad off the region is financially.
For the moment, anyways, the EUR continues to enjoy the spotlight while the market awaits the results of the recent stress tests. Risk appetite in the market has surged from a wave of optimism. Since the EUR-Zone isn't expected to publish any news today there is very little chance of a reversal and traders are still taking the opportunity to join the uptrend before it comes crashing down.
JPY - Yen Trading at 7-Month High vs. US Dollar The Japanese Yen has gradually gained against the US Dollar in this week's trading. Asian stocks took a small hit last week, but they appear to be on the rebound as of yesterday. On the other hand, the JPY has been surging against the USD, with a current value near a seven-month low of 87.00.
Against other currencies, such as the EUR and British Pound, the Yen has experienced similar gains. The EUR/JPY currently trades near record lows of 112.50, while the GBP/JPY also sits just above its all-time low with a current price of 133.23. So long as news reports come out neutral and with few surprises, there may be a strong chance for the JPY's current trends to continue throughout the week. - Declining US Inventories Could Help Raise Oil Prices
The price of oil has been gradually rising this week as the US Dollar continues its decline. The volatility in the oil market appears to have subsided somewhat, following the successful capping of the gushing BP oil spill in the Gulf of Mexico. As long as the cap holds, speculators can take a more accurate gauge of market sentiment towards oil demand.
The American Crude Oil inventories report is expected later today at 14:30 GMT. Inventories have been in decline these past 2 months and if they continue to fall we could see a continued rise in price. A target near $80 this month may not be far off the mark.
Technical News
EUR/USD Yesterday's steep decline may have brought the pair back in range as most indicators seem to be floating in neutral territory at the moment. Looking at the daily chart, it is evident that there might still be room for a continuation of the downward trend as the RSI is still floating in the overbought territory. Waiting on a clearer direction for the pair may be advised for today.
GBP/USD The pair seems to be range trading at the moment, with most indicators floating in neutral territory. However, there is bearish cross evident on the Weekly chart's Slow Stochastic indicating a bearish correction might take place in the nearest future. Going short with tight stops appears to be preferable strategy.
USD/JPY The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. The 4 hour charts do not provide a clear direction as well. Waiting for a clearer sign on the hourlies chart might be a good strategy today.
USD/CHF The typical range trading on the hourly chart continues. The daily chart RSI is floating in neutral territory. However, there is an impending bullish cross forming on the Weekly chart's Slow Stochastic indicating a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The Wild Card Silver Silver prices are once again dropping, and it is currently traded around $17.60 an ounce. And now, the 8-hour chart's RSI is giving bullish signals, indicating that silver prices might go up. This might give forex traders a great opportunity to enter a very popular trend.
(Reuters) - How much would the U.S. economy have to weaken for the Federal Reserve to try to push borrowing costs even lower?
That question will loom over Capitol Hill this week as Fed Chairman Ben Bernanke delivers his semi-annual testimony on monetary policy to Congress on Wednesday and Thursday.
The answer may rest, as it so often does, on jobs. If a recent softening in a range of economic data is matched by greater unemployment, the U.S. central bank may be forced to take action, even if its room for maneuver is now limited.
Lawmakers, keen to appear proactive ahead of mid-term elections in November, will try to coax Bernanke into backing their respective agendas, with Republicans pressing him on the budget deficit and Democrats on the need for more stimulus.
He will probably stop short on both counts, preferring instead to dwell on the monetary policy options available to the Fed if the economy were to worsen appreciably.
Bernanke faces the difficult task of convincing Congress the Fed is not powerless to deal with slower growth, without appearing so worried about the outlook as to suggest further easing may be imminent.
"At this moment, he and the (Fed's policy) committee are not prepared to do anything. They feel they've used up most of their bullets, and they don't want to go there," said Kevin Logan, chief U.S. economist at HSBC.
"It will be a fine line between not showing any panic or undue concern but at the same time making it clear that they're watching this and will do what's necessary."
There are good reasons for the Fed to be reluctant. A renewed easing would represent a big about-face for a central bank that just a couple of months back was avidly discussing its exit strategy from extraordinary stimulus measures.
Then there is the issue of effectiveness. With interest rates effectively at zero, can the Fed really do more?
Sure. It could resume buying longer-term Treasury debt or mortgage-related assets, extending a controversial program that saw the Fed take on more than $1.5 trillion of these assets.
It could also reduce the amount it pays banks to park their excess reserves at the Fed. It could even, at an extreme, target a specific yield level on Treasury notes, a possibility broached by Bernanke in a 2002 speech on battling deflation.
DIVIDED WE STAND STILL
But none of these options are very attractive. With asset purchases, or even yield targets, it is unclear how much bang the Fed would get for its newly minted bucks. The same applies to interest on reserves. If the problem is lack of demand for credit, steps aimed at encouraging banks to lend more may not do any good.
Some regional Fed officials have a natural dislike of buying mortgage debt, believing it comes too close to crossing the line into a fiscal policy that benefits one sector of the economy over others.
Such concerns raise the bar for any Fed action to a high level. Fed Governor Kevin Warsh indicated as much last month when he argued further expansion of Fed credit to the banking system, already at a record $2.3 trillion, would need to be subject to "strict scrutiny."
"It would require a heck of a lot more," said Paul Ballew, a former Fed staffer and now chief U.S. economist at Nationwide in Columbus, Ohio.
U.S. unemployment currently stands at 9.5 percent, while inflation remains quite tame, and does not appear to be a near-term threat. Bernanke will have to be careful not to spook investors into believing things are actually even worse than they thought.
"If they signal they're going to do something, that could have an adverse effect on financial markets," Ballew said.
The Fed faced some tough times during the financial crisis that began in the summer of 2007 and reached fever pitch in 2008. But from a policy standpoint, the current period may be even tougher, Ballew says.
The uncertainty is creating rifts within the Fed's policy-setting Federal Open Market Committee. The minutes of the last FOMC meeting suggested as much.
Some members were worried about deflation and were keen to talk about what steps the Fed might take in the event of further economic deterioration. Others, in contrast, were still pushing to tighten financial conditions by beginning asset sales in the near term.
One official, Kansas City Fed President Thomas Hoenig, continues to push for a near-term rate increase to thwart inflation threats.
Yet with so many Americans dealing with foreclosures, unemployment or both, lawmakers are likely to press hard on the issue of what more can be done to bolster growth.
A key impediment to further easing is the fear among policymakers that markets will see the Fed as monetizing the U.S. government's budget deficit. So if Congress does want the Fed to act, it better not push too hard.
(Reuters) - The White House is trumpeting a "summer of economic recovery," but it could soon be facing a winter of discontent.
President Barack Obama, Vice President Joseph Biden and other officials have visited far-flung locales such as Holland, Michigan, Louisville, Kentucky, and Barre, Vermont, to see first-hand some of the projects financed by an $862 billion stimulus package passed last year.
While economists generally agree the recession would have been worse without the government spending spree, it's a hard sell to voters with unemployment at 9.5 percent and unlikely to fall much by November's congressional elections.
"I think it's a very risky strategy to use the term 'recovery' and the promise and claim of recovery when for many Americans, the evidence is simply not there," said Julian Zelizer, a history professor at Princeton University.
White House officials are trying to frame the mid-term elections as a choice between Republicans, whose policies the administration says caused the economic mess, and Democrats, who are trying to dig the country out.
Dana Milbank, a Washington Post columnist, pointed out this wasn't exactly the stuff of catchy bumper sticker slogans. "Vote Democratic. Things might have been even worse without us" probably won't sway voters, he wrote.
CREATED OR SAVED?
The recovery theme cropped up often in the administration's recent tours of taxpayer-funded projects.
"This summer is sure to be a Summer of Economic Recovery," Ron Sims, deputy secretary of Housing and Urban Development, wrote on the White House blog last month after visiting a senior citizen apartment complex being built in Baltimore.
The White House says the "Recovery Summer" slogan was not a promise that unemployment would fall rapidly. Rather, it was intended to draw attention to the variety of stimulus-funded projects that were now up and running.
"We understand that we aren't always going to get credit for digging us out of a ditch until we're out of the ditch," said White House deputy communications director Jen Psaki.
"What we have to keep our focus on is telling people what we are doing and talking about the success of the clean-energy projects and the battery investments and the small businesses that are working again," she said.
Projects funded by the stimulus are beginning to "really ramp up," Biden told the ABC program "This Week."
"We have two, three times as many highway projects going. We have significant investment in broadband for the first time now," Biden said.
The upbeat message doesn't seem to be resonating. Consumer confidence is weakening with less than four months to go until the congressional elections.
The Thomson Reuters/University of Michigan's consumer sentiment index released on Friday sank to its lowest level in 11 months in July, a much steeper decline than economists had predicted.
The survey's gauge of consumer expectations slid to the lowest level since March 2009, when stock markets were at their weakest point of the recession amid fears of another Great Depression.
"This is bad news, clearly," said Jennifer Lee, senior economist at BMO Capital Markets. "We need job growth now more than ever."
Indeed, the poor job market lies at the heart of public dissatisfaction with Obama's handling of the economy.
The administration did not do itself any favors when it released a report on Wednesday saying the stimulus package created or saved millions of jobs.
"Does the White House really think we are buying that unicorn poop?" was one reader's comment on reuters.com.
ROSY SCENARIO PARTLY RIGHT
Republicans pounced on the report at a congressional hearing on Wednesday with White House economic adviser Christina Romer. They pointed out that Romer had co-authored a paper, released in January 2009, predicting that stimulus spending would cap the jobless rate at 8 percent.
In fact, unemployment peaked at 10.1 percent last October.
Romer said that forecast error stemmed from a steeper-than-expected drop in economic activity in late 2008 and early 2009 and was not an indication the stimulus failed.
"Before the stimulus could have done anything, the economy deteriorated rapidly," she said.
While her employment target was off, Romer's 2010 economic growth forecast -- which earned her the derisive nickname "Rosy Scenario" among those who thought she was wildly optimistic -- has proved accurate.
Back in February 2009, when Obama presented his first budget proposal, the administration's forecast called for 2010 growth of 3.2 percent. At the time the "Blue Chip" consensus of leading economists was just 2.1 percent. Those forecasts have since come up and are now in line with the White House's view.
Unfortunately for the White House, the economy is still not creating enough jobs to make much of a dent in the unemployment rate.
The U.S currency dropped to its weakest level in 2010 against the Japanese Yen as signs the U.S. economic recovery is losing momentum supported speculation that the Federal Reserve will keep borrowing costs low for the rest of the year. The USD also declined versus the EUR for the first time since May as a gauge of U.S. consumer confidence dropped more than economists expected and corporate revenue missed analyst forecasts. Economic News
USD - Dollar Weakens on Signs of Economic Slowdown The U.S Dollar fell the most against the EUR in 14 months and dropped to the lowest level this year versus the Yen as economic reports added to evidence that the U.S. recovery is losing momentum.
The greenback touched a level weaker than $1.30 versus the European currency as minutes of the Federal Reserve meeting last month indicated policy makers trimmed their forecasts for growth.
On Friday, a private survey showed U.S. consumer sentiment weakened in early July to an 11-month low and capped a week which saw U.S. data on the softer side, raising questions about the sustainability of the U.S. recovery.
Investors are closely watching the USD/JPY for the possibility of the greenback dropping to a 15-year low by breaching the November 2009 trough of 84.00 yen. Analysts said with U.S. yields heading lower, the Dollar could break past support around its 7 month low of 86.25 yen in the next few days.
EUR - EUR May Erase Gains on Bank Stress Tests The European currency rose for a 3rd straight week against the U.S Dollar ahead of partial results of stress tests on the region's banking system, which are due on July 23. The 16 nation currency has surpassed $1.30 on Friday for the first time since May and traded around $1.2950.
The EUR has rallied 8.9% versus the Dollar since reaching a 4 year low of $1.1877 on June 7 as concern eased that Europe's sovereign-debt crisis would undermine the region's economic recovery.
However, the EUR may reverse its recent advances against the U.S Dollar given the slim likelihood of a very positive surprise from European bank stress tests this Friday, analysts said. European regulators will be examining the strength of 91 banks to determine if they can survive potential losses on sovereign bond holdings. The European currency is unlikely to fall past $1.20 unless there is a major negative surprise given that U.S. economic growth shows signs of slowing down.
JPY - Yen Rises Towards Year's High The Japanese Yen rose toward its strongest level this year against the U.S Dollar as signs the U.S. economy is losing momentum added to speculation that the Federal Reserve will keep interest rates at almost zero this year. The Yen also rose against the Dollar as falling U.S. yields continued to weigh on the U.S. currency, with traders targeting stop-loss orders placed under 87.00 Yen.
Japan's currency gained versus all 16 of its major counterparts and rose toward the strongest level this year. The Japanese currency traded at 87.20 per USD from 87.40 yesterday, after climbing to 87.17, approaching this year's high of 86.97 set on July 1.
Crude Oil - Crude Falls below $76 On Poor U.S. data Crude Oil prices fell below $76 a barrel in early Asian trading Monday, extending the previous session's decline on concern about the U.S. economic outlook after data showed consumer sentiment fell to a near one-year low.
However, analysts said marginal slide in Oil prices shows that Crude was receiving ample support at above $74 a barrel, thanks to bullish inventory reports that showed large draw downs in U.S. Crude stockpiles over the past three weeks. Technical News EUR/USD Following the prolonged upward movement the pair has experienced recently, it appears a bearish correction may be imminent. The Relative Strength Index on the 8-hour chart is currently in overbought territory, as is the Stochastic Slow on the daily chart. Traders are advised to go short with tight stops today. GBP/USD
Mixed technical signals indicate that no clear direction for this pair is presenting itself at this time. While the Stochastic Slow on the 4-hour chart indicates the pair may experience upward movement later today, the Relative Strength Index on the 8-hour chart shows the opposite. Traders may want to take a wait and see approach for this pair today.
USD/JPY Most technical indicators are showing this pair trading in oversold territory, indicating that an upward correction will likely occur today. The Stochastic Slow on the daily chart shows a bearish cross forming, and the Relative Strength Index on the 8-hour chart supports the theory that upward movement is forthcoming. Going long may be the preferred strategy today.
USD/CHF Practically all technical indicators show the pair currently trading in neutral territory, with no clear direction at this time. These include the Stochastic Slow and Relative Strength Index on the 8-hour and daily charts. Traders are advised to take a wait and see approach for this pair today.
The Wild Card Hang Seng Index The Slow Stochastic on the 8-hour chart shows a bearish cross forming, indicating that upward movement could occur in the near future. The Relative Strength Index on the 4-hour chart supports this theory. CFD traders are advised to go long with tight stops today.
Slower Growth, Low Inflation with Big Budget Deficits
* Retail sales and industrial production set the tone for the economic outlook as momentum has slowed to a three month pace of 4 percent compared to a 7 percent year-over-year gain. This slowdown outlook was reinforced by comments by the Federal Reserve. * Inflation, meanwhile, measured by the Consumer Price Index, is now up just 1.1 percent over the past year. Substantial slack in the economy will likely continue to put downward pressure on core CPI inflation. Slow growth and low inflation suggests big federal fiscal budgets persist for the outlook horizon. Moderate Paced Recovery with Low Inflation
A Dose of Reality from the Fed: Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants' interpretation of the Federal Reserve's dual objectives; most expected the convergence process to take no more than five to six years.
Recent data suggest economic momentum has slowed. Retail sales slowed to a three-month pace of 4 percent compared to a 7 percent year-over-year gain. This slowdown was reinforced by comments made by the Federal Reserve at the June meeting. The Fed suggested that the economic recovery was proceeding at a moderate pace in the second quarter but that the unemployment rate remained elevated. Yet, aggregate hours worked by employees on private nonfarm payrolls rose substantially through May suggesting continued forward momentum.
Reinforcing the Fed's view, industrial production figures this week indicated moderation over the past three months especially for consumer goods including autos. In contrast, business equipment production, including computer and electronic products, remains solid. Exports, business inventory rebuilding and the longer-run imperative of global competition have provided forward momentum to industrial production. Our July outlook is for 1-2 percent growth in GDP in the second half of 2012, with positive contributions from consumer spending, business equipment investment and government purchases. Inflation: CPI Moderation at a Low Level
On the inflation front, falling energy prices held down headline consumer prices in June, with overall CPI now at 1.1 percent year over year, while core consumer prices are at just 0.9 percent.
Fed: Nonetheless, the possibility that inflation expectations might start to decline in response to persistently low levels of actual inflation and the potential effects of continued weakness of the economy on price trends were seen by a few participants as posing some downside risks to the inflation outlook.
Clearly there is little pricing power for suppliers as it appears that keeping market share is the driving force. Our July outlook is for overall CPI to stay in the 1 percent range for the rest of this year. The Federal Budget Outlook and Our Foreign Friends The fiscal year-to-date deficit reached more than $1.0 trillion in June, and we estimate the deficit-to-GDP ratio will finish this year above 9 percent. The slight reduction of the deficits in recent months has been due to better economic growth so the recent slowdown in growth expectations is a negative signal for the deficit moving into the next fiscal year. Our outlook is for fiscal deficits to come in at $1.3 trillion on average for fiscal 2010 and 2011. Ominously, net foreign purchases of Treasury bonds and notes fell in May. Foreign official purchases of short-term securities also declined.
U.S. Outlook
Housing Starts • Tuesday
Housing starts are expected to remain within the range that has been maintained since the beginning of 2009. The market still has an oversupply of homes, and builders do not yet have a reason to add to it—demand is still soft, particularly in the wake of the first-time homebuyers' tax credit. The pullback seen in May could continue in June as sales have been extremely weak without government support, making builders exceptionally cautious.
The dismal labor market has also weighed on demand. Our expectation that the housing industry will be in the doldrums for some time was confirmed in May's reading of building permits, down 9.9 percent, and we anticipate weakness continued in June. Residential construction will likely detract from third quarter GDP growth.
Previous: 593K Wells Fargo: 580K Consensus: 581K
Existing Home Sales • Thursday
Existing home sales turned in a 2.2 percent decline in May, and we expect another weak result in June. The expiration of the first-time homebuyers' tax credit means that demand will be determined in the market without government influence for the first time in months. However, the effect of the tax credit was to pull demand forward for eligible buyers, so underlying demand is likely even lower than it otherwise would have been without the tax credit. The market will likely spend the summer finding its new sales pace, and our expectations are quite low.
Low mortgage rates are a bright spot for the housing market, which may entice certain buyers into the market; however, stricter lending standards limit the pool of qualified buyers.
Despite a steady string of positive readings since March 2009, it appears that the run has ended for the Leading Economic Index. We expect a slight drop to -0.1 percent, though the swing variable could very well be the building permits number, which prints on July 20 and is an important component of the index.
Slowing supplier deliveries, as seen in many recent surveys of the factory sector, as well as weakness in stocks in the month of June will detract from the index. The disappointing labor market, which has become a motif of late, will also weigh on the headline. While the leading index is paring its recent gains, we do not anticipate a double-dip recession; instead, a slower pace of growth in the second half is the most likely outcome.
* After a sharp rebound, the year-over-year rate of GDP growth in China slowed in the second quarter relative to the first quarter. The lending restrictions that the government directed banks to take a few months ago appear to have had their desired effects. * Although we look for further slowing in the quarters ahead, we do not look for a "hard landing" in China. Indeed, recent declines in equity and housing prices and benign inflation may cause the government to ease up on the brakes somewhat.
Chinese Economy Starts to Slow
Recent data show that real GDP growth in China slowed to 10.3 percent in the second quarter from 11.1 percent in the first quarter of 2010 (see graph on front page). Some of the slowdown in the year-over-year rate of economic growth reflects base effects. The first quarter of 2009 marked the nadir of the global downturn, making a strong year-over-year growth rate in the first quarter of this year easy to achieve. That said, it appears that economic growth slowed on a sequential basis as well in the second quarter due, at least in part, to a deliberate attempt by authorities to take some steam out of the economy.
In the midst of the global downturn, Chinese officials encouraged banks to ramp up lending in order to support the domestic economy. When it became apparent earlier this year that the global economy was on the mend, China no longer needed economic stimulation. Indeed, sharp rises in house prices in some cities indicated that tighter economic policies were appropriate. Therefore, the government directed banks to rein in lending and a sharp slowdown in loan growth ensued (top chart). The directives were largely targeted at excessive real estate investment, and the recent slowdown in fixed-investment spending suggests that the measures are having their desired effects (middle chart). In that regard, growth in the value of construction spending edged down in the second quarter and further deceleration seems likely.
Is the Chinese economy destined for a "hard landing"? Probably not. Outside of the construction sector there are few apparent signs of significant slowing, at least not yet. The year-over-year growth rate in retail spending continues to clip along around 18 percent, and export growth picked up to 40 percent in the second quarter from 30 percent in the first quarter. Although we expect export growth to slow in coming quarters, another downturn in exports seems unlikely unless the global economy falls back into a recession, which we do not expect.
Moreover, the recent behavior of prices, both in terms of assets and goods and services, means that the government may be able to somewhat ease up on the brakes. The stock market (as measured by the Shanghai Composite index) is off about 25 percent since mid-April, and the widely followed 70-city index of house prices edged down in June for the first time in more than a year. In addition, the year-over-year rate of CPI inflation declined to 2.9 percent in June from 3.2 percent in May (bottom chart). Although deceleration in food prices contributed to the decline in the overall rate of CPI inflation, non-food price inflation also edged lower in June. In other words, there is less evidence today to support the view that the Chinese economy is overheating than there was a few months ago.
Although the government may ease up on the brakes somewhat in terms of monetary policy, we expect its renewed willingness to allow some flexibility in the exchange rate to continue. The currency strategy group projects that the dollar will weaken about 5 percent versus the renminbi over the next 12 months or so.
Global Outlook
Bank of Canada Policy Meeting • Tuesday
At its policy meeting on June 1, the Bank of Canada (BoC) raised its target for the overnight lending rate to 0.50 percent from 0.25 percent, the first rate hike in nearly three years. In its statement announcing the rate hike, the BoC noted that "considerable monetary stimulus" is still in place. Given the recent strength in the labor market, we concur with the consensus forecast that the BoC will hike rates by another 25 bps.
Data on retail sales in May and CPI inflation in June will also be released next week, but the BoC probably won't have the luxury of seeing the data before its rate decision. Retail sales are expected to have bounced back in May from their unexpected decline in April, and CPI inflation should remain benign. That said, inflation could rise over the medium term if abnormally low interest rates excessively stimulate the economy.
It appears that industrial production (IP) in Germany strengthened considerably in the second quarter. Indeed, IP in the April/May period shot up nearly 5 percent relative to the first quarter, and the high level of the Ifo index in June suggests that IP remained solid during the final month of the second quarter. The Ifo index for July will offer investors some insights into the state of the German economy thus far in the third quarter.
Elsewhere in the Euro-zone, data on French consumer confidence and consumer spending are slated for release next week as well. Italy prints data on industrial orders and sales, consumer confidence, and retail sales. The "flash" estimates of the Euro-zone manufacturing and service sector PMIs are also on the docket next week.
Previous: 101.8 Consensus: 101.5
British GDP • Friday
Positive growth has returned to the U.K. economy, but the rate of recovery has been slow, at least through the first quarter. However, monthly indicators suggest that growth strengthened somewhat in the second quarter. For example, industrial production in the April/May period was up 1.1 percent relative to the first quarter. Therefore, most analysts, including us, look for an increase in the rate of GDP growth when the figures for the second quarter print on Friday.
Other data released earlier in the week will give investors further insights into the state of the British economy at present. A widely-followed business survey will shed some light on business sentiment, and retail sales data will show how consumer spending fared in June.
Like a good corporate investor relations head, the FOMC has given us guidance on interest rates and, like a good equity analyst, we pay attention.
The FOMC modestly lowered its projection for growth and inflation for the next two years. Growth in 2010 is now at 3.0-3.5 percent, which is slightly above our number. The FOMC cited tighter financial conditions resulting from spillover effects from Europe, while we would add that housing is not bouncing back as some expected after the first-time homebuyers' tax credit was discontinued. Unemployment also has been higher than the FOMC expected. We expect unemployment rates to stay in the 9.5 percent plus range this year. The FOMC also lowered its inflation outlook for core PCE prices for 2010 and 2011 as well.
Downside risk to the outlook for inflation was also discussed and the risk of deflation was cited by a few (more than one) participants. Given such guidance, our expectation is that the FOMC is unlikely to move the funds rate this year or through the first quarter of next year. Only some upside growth/inflation surprise is likely to get any movement.
Long Rates: Growth, Inflation, the Euro and Federal Deficits
Meanwhile our expectations are for five- and 10-year Treasury rates to remain around the 2 and 3 percent levels for the rest of this year. Two big positives for Treasury rates this year have been less than consensus expectations for both growth and inflation. Throw in a little flight-to-safety from the Euro and you get lower Treasury yields.
Risk remains in the large fiscal deficits and the dependence of the United States on foreign investors. As reported earlier this week, foreign demand for long-term U.S. assets fell in May as net purchases of Treasury bonds and notes fell significantly. Growth and inflation dominate but the delicate financing balance remains a concern.
Consumer Credit Insights An Increasingly Bifurcated Economy
This week, FICO reported that as of April, 25.5 percent of consumers now have a credit score of 599 or below, a significant jump from the pre-recession average of 15.0 percent. On the other hand, the share with a score of 800 or higher has risen to 17.9 percent versus a pre-recession average of 13.0 percent. The ranks of those with moderate credit scores between 650 and 699 have dropped to 11.9 percent from a pre-recession average of 15.0 percent. The reasons for the increase in the lower credit score range are numerous, including over-indebtedness, missed payments, job losses and foreclosures. But what accounts for the increase in the top score range? Those individuals who are lucky enough to have a job are likely putting more of their income toward paying down debt. Similarly, those who are lucky enough to still have equity in their homes are refinancing at record-low mortgage rates. Both of these actions can help to improve credit scores by either reducing debt or debt service burdens. This speaks to a bifurcated economy, one where those who are doing well are getting really good deals and shoring up their balance sheets, while those who are already going through difficult times are finding things getting even worse. With credit conditions tight across the economy, even those with good credit are still finding it challenging to get a loan, while those with bad credit are finding credit nearly impossible to obtain. This imbalance between supply and demand does not bode well for lenders.
Topic of the Week
States struggle to balance budgets
July 1 marked the beginning of fiscal-year 2011 for most states, and state officials are faced with tough decisions concerning their budgets. Slow economic growth coupled with the legal obligation to balance budgets forces states to continue to raise taxes and/or cut spending.
Record high unemployment levels have increased demand for state spending as more people qualify for assistance programs. States have projected total budget deficits of $127 billion in 2011. While less than the shortfalls of the past two years, this deficit will prove more difficult to close. Under the stimulus program enacted in 2009, the federal government was able to plug 30-40 percent of state budget shortfalls in 2009 and 2010. However, the funding will run out in December and Congress has yet to show any signs of extending assistance.
Two states facing significant financial woes, Arizona and California, show that states are looking to make considerable spending cuts. Arizona projects a structured shortfall of $1.69 billion. The budget solution consists of a 26 percent reduction in spending, cutting back on temporary cash assistance eligibility, as well as Medicaid services for more than 1 million Arizonans. The state imposed a 1.1 percent rise in the sales tax rate, creating the expectation of a 4.3 percent rise in base revenues. However, the boycotts some cities are calling against Arizona over its immigration laws may impact tourism and lead to lower-than-expected fiscal revenues.
Last year, California was able to close its budget gap of $60 billion, draining most of its rainy day fund, yet the state faces a $19.1 billion gap again this year. To help close the gap, California will reduce expenditures by $12.4 billion. Still facing unprecedented unemployment levels of 12.4 percent, California is looking at a rough road ahead. The cuts in state spending will continue to counterweight the federal stimulus and place a drag on the slow growing economy.
* Data releases this week have suggested a downgrade to our estimate for Q2 GDP growth in the U.S. from 3.6% to the range of 2.0-2.5%. * This decline in our estimate is primarily driven by much stronger import growth than previously anticipated, and an earlier than expected slowdown in consumer spending. * That said, it appears domestic demand growth will still accelerate in Q2 as businesses continued to invest heavily in new capital equipment. * Core consumer prices surpassed market expectations and grew by 0.2% M/M during June, keeping the annual growth rate steady at 0.9%. All and all, expect markets to remain wary of the potential for future deflationary pressures. * Canada's trade deficit widened to $500 million in May. Although trumped by a 4.2% real import advance, exports volumes still rose a robust 3.9% M/M. * Canadian manufacturing shipments gained by a respectable pace of 0.4% M/M in May. Although inventories contracted on the month, draw-down pressures have largely abated, and new and unfilled order both rose. * The Bank of Canada's Business Outlook Survey for Q2/2010 revealed that businesses remain optimistic and more firms are reaching capacity. However, fewer businesses plan to invest than in the previous quarter. * Canadian housing data for June showed that cooling is underway, with a 8.2% M/M tumble in sales and a 2.5% M/M decline in the seasonally-adjusted average price.
UNITED STATES - DOWNSIDE RISKS TO Q2 GROWTH
This week's data offers clear evidence that our Q2 GDP forecast for 3.6% annualized growth is too optimistic, and should be downgraded to the 2.0 - 2.5% range. However, this material decline in our headline GDP estimate does not adequately reflect the true state of domestic demand growth - which will almost certainly be stronger than GDP - nor does it fundamentally alter our outlook beyond the current quarter. Indeed, the downside risks to our Q2 estimate come from much stronger than anticipated import growth, and weaker consumption expenditures. However, there is also upside-risk in the form of strong business spending on equipment and software that could temper any slowdown in consumption expenditure growth.
The principle data release that prompted us to reconsider the Q2 forecast came on Tuesday, when the Census Bureau reported that the U.S. trade deficit widened from $40.3 to $42.3 billion in May. Of course, there is nothing unusual about a change in the trade balance of this magnitude, yet it does come on the heels of significantly stronger import growth. Even under a modest assumption that real imports don't change dramatically in June, Q2 real imports are poised to grow by 16.2% annualized - in contrast to the 8.7% we had previously built into our projections. This will be only slightly offset by faster than anticipated export growth. Overall, this will result in a bigger drag to GDP growth - somewhere in the neighborhood of 0.6 percentage points.
However, such a write-down from trade must be viewed in the proper context. Imports are demanded and purchased by households and businesses within the U.S. economy. As such, this quarter's stronger than conjectured import figures actually point to domestic demand growth in the neighborhood of 4% growth - in contrast to an average of 2% in the prior three quarters of the recovery. While consumer spending is likely slower than initially thought, it appears that strong business investment will offset a good portion of that. Indeed, the details of May's trade report shows some evidence of this. On a 3-month moving average basis, import growth of capital goods excluding autos reached a record high in May - the series began in 1994 - of 3.8%, highlighting that already strong business investment in equipment and software will most likely grow faster than the 12% annualized pace we had originally envisaged.
Our Q2 GDP forecast also suffered a blow after we received the Census Bureau's advanced retail sales report for June. Broadly, retail sales did improve during Q2, yet consumers purchased less big-ticket durable goods than originally expected. As opposed to the impact from trade, this slow-down reflects recent concerns that the pace of the recovery is easing and will lower domestic demand. This development is not too surprising, and we've been anticipating this slowdown for sometime - only we expected it would be more evident in the second half of 2010 instead. All told, sluggish Q2 retail sales puts the risks to our second quarter estimate of personal consumption expenditure on the downside, which is important given its 70% weighting in GDP.
All in all, recent data releases indicate that the pace of economic expansion has started to moderate following the initial rebound. This is a trend we have always expected and thus remain very comfortable with our forecast for the second half of the year. However, specifically for the second quarter, weaker than expected retail sales - particularly in the durable goods component - and strong import growth, suggest that the balance of risks to our forecast lay to the downside. With this in mind, there are a few key points to remember. Consumption expenditure will continue expanding, simply at a slower rate than we'd originally predicted for the quarter. Further, it appears that businesses have continued to gear up spending on capital equipment, which will offer a partial offset to the more sluggish consumer. Finally, the downside risks to GDP created by strong import growth could be misleading with respect to the recoveries underlying strength, as domestic demand should increase around 4%, well above its trend growth rate.
CANADA - THE RECOVERY REMAINS A WORK IN PROGRESS
Recent data has provided confirmation of the sound clip for Canadian GDP growth in Q2/2010, which appeared to advance by above 3% Q/Q annualized, but has also underscored the challenges facing Canada's economy as it recovers. The next quarters will feature a delicate hand-off from households to firms as the torchbearers of recovery, and the pace of growth will certainly slow in coming months. The shape of the next phase of recovery will depend on whether firms, responding to the abundant near-term incentives to invest, nimbly grasp the baton. Growth in consumption and a rebound in homebuilding have been major spurs for the overall economy. However, propulsion through these channels will slow, as growth in household spending and debt ease to rates in line with growth in personal incomes. In the face of a shaky trade balance, greater investment by firms is needed to prop up domestic demand and improve Canada's business sector productivity.
In data this week, Canada's international trade balance deteriorated in May but the report's details were more positive. Exports posted a very robust real gain of 3.9%, strongly driven by automotive products, but were outshone by imports, which rose 4.2% in real terms, boosted by office equipment, consumer goods and industrial materials. This presages a continuing contribution from second quarter retail spending, and the boost to machinery and equipment (M&E) imports bodes positively for a hoped-for investment pick-up.
Manufacturing shipments, which are strongly driven by exports, performed respectably in May, gaining by 0.4% M/M in real terms. Gains in shipments of motor vehicles and M&E goods were partially offset by declines in petroleum product sales. Forward-looking indicators for demand were also positive, with new and unfilled orders increasing in key durables goods industries. However, the pace of manufacturing is slowing after an initial surge of recovery. As well, the smoothed composite leading indicator for June, released at the week's end, continued to grow at a robust pace. The smoothed indicator correlates well with quarterly growth in GDP and also points to a strong if slowing pace of growth in the second quarter. Nonetheless, while most underlying components gained when smoothed with the 5-month moving average, the most recent data for the unsmoothed components were less impressive and point to an ebbing pace of recovery in the months to come. In particular, Canadian equity markets have been volatile in recent months, with the TSX falling by 7.5% from the end of April to the end of June, buffeted by concerns about sovereign debt and uncertainties about the global recovery.
Concurrently, Canadian housing is rapidly cooling. June data showed a decline in sales of 13.3% in Q2/2010, and a fall of 0.7% in the seasonally-adjusted monthly quarterly average price. Given over-pricing of Canadian housing, we expect prices to slide during the remainder of 2010, retracing to pre-recession levels. While the structure of Canada's mortgage markets makes housing resilient to the sort of crash experienced stateside, moderation in housing markets points to slower homebuilding and slower consumption growth.
Again, it will be increasingly up to Canadian businesses to boost activity. Providing insight into firm sentiment, the Bank of Canada's Business Outlook Survey for Q2/2010 showed general optimism that Canada's recovery will continue, but did underscore businesses' uncertainty with fewer firms anticipating future sales growth. Somewhat worryingly, there was only a 12% balance of opinion towards planning machinery and equipment investments, compared with 22% in the previous quarter.
Looking forward to next week's interest rate decision by the Bank of Canada, the near-term pace of rebound and continuing uptake of slack point to the careful removal of some of the still-exceptional monetary stimulus. Core price growth is still riding near target and, with indicators of capacity improving, the Bank will almost surely lift the overnight rate by another 25 basis points to 0.75% while underscoring the economic uncertainties in its communiqué, leaving an open door to a pause on rate hikes if conditions warrant.
CANADA: UPCOMING KEY ECONOMIC RELEASES
Bank of Canada Interest Rate Decision
* Release Date: July 20/10 * Current Rate: 0.50% * TD Forecast: 0.75% * Consensus: 0.75%
We expect that the Bank of Canada will stay true to its newly established strategy of combining a 25 basis point rate hike with a dovish communiqué. This will bring Canada's overnight rate of interest to 0.75%. While both domestic and global conditions have deteriorated modestly since June, the underlying momentum in the Canadian economy warrants the continued normalization of policy in the near term. When we look further into the future, the impact of financial market turmoil and decelerating economic growth is more difficult to quantify. In recognition of this uncertainty, we have scaled back our forecast for rate increases, and now look for a year-end overnight rate of 1.25% and a rate of 2.50% by the end of 2011.
Canadian Retail Sales - May
* Release Date: July 22/10 * April Result: total -2.0% M/M; ex-autos -1.2% M/M * TD Forecast: total 0.0% M/M; ex-autos 0.0% M/M * Consensus: total 0.5% M/M; ex-autos 0.5% M/M
After posting an outsized decline in April, consumer spending is expected to have regained its footing in May. Total retail sales are forecast to have remained unchanged, as a decline in gasoline prices will have offset modest gains across the other expenditure categories. Auto sales are also estimated to have been flat on the month, which will contribute to the lack of direction in the headline number and to the identical ex-autos forecast. Given the sharp decline in resale housing activity in May, housing-related purchases are also expected to be another pocket of weakness. The decline in consumer prices in May will help real retail sales post a modest gain, which in turn will provide some offset to the weakness in manufacturing shipments in supporting real GDP in the month. Nevertheless, if left unrevised, the fall in retail sales recorded in April will weigh heavily on second quarter consumer spending. While the solid momentum in the labour market will prevent an outright contraction, we note that softer wage growth will ensure consumer spending decelerates through the second half of the year.
All-items CPI inflation is forecast to moderate for the third consecutive month due to falling energy prices and a favourable base-year effect from an elevated year-ago price level. On a month-over-month basis, the impact of weaker energy prices is expected to lower the non-seasonally adjusted all-items price level by 0.2%. The seasonal adjustment will likely take a bigger bite out of the all-items price level, with an expected decline of 0.4%. Turning to core inflation, we forecast a temporary deceleration to 1.6% in June before the steady absorption of spare capacity gradually pulls core inflation higher over the second half of the year. On a non-seasonally adjusted basis, core prices are forecast to fall by 0.2% while the impact of seasonal factors provides a bit more heat to the core number, translating to an expected increase of 0.1% in June. If our forecast for June CPI is correct, it will bring all-items and core inflation for Q2 to 1.4% and 1.7% respectively, which is softer than the Bank of Canada had forecast in April (Q2 all-items: 1.7%, core: 1.9%). While the Bank's internal forecast for inflation has most certainly been revised since then, the public update will be contained in the release of the update to the Monetary Policy Report on Thursday. While the softer inflation trajectory through Q2 did not convince the Bank to hold off hiking rates in June (and is not expected to warrant a pause on Tuesday), it does allow for a more leisurely pace of policy normalization over the balance of the year.
(Reuters) - Profits for makers of packaged goods such as soap, soda and food will likely be hit by the hunger of consumers and retailers for discounts and may prompt the sector to rethink its pricing strategy.
Analysts and industry executives think the aggressive discounting that has flooded store shelves recently could ease by the end of the year, as the costs for commodities such as wheat and meat begin to rise.
"It's going to be a fine balancing act because the consumer appears to still be very, very price sensitive and value oriented," said Esther Kwon, a Standard & Poor's equities analyst, of attempts to reduce discounting.
Some manufacturers resorted to widespread promotional discounting in 2009 and 2008 to lure back consumers who switched to lower-priced store brands during the recession. Using limited-time promotions instead of outright cuts in list prices lets manufacturers recover pricing more easily when the economy improves.
Discounting became a bigger issue earlier this year when Wal-Mart Stores Inc (WMT.N), the world's largest retailer, ramped up competition with thousands of price "rollbacks."
While some of the promotional discounts are made up by retailers cutting costs, manufacturers are also called on to contribute money to pay for the promotions, which is then deducted from sales on company income statements.
That in turn pressures profits and is expected to be a key factor when companies such as household product maker Procter & Gamble Co (PG.N) and cereal maker Kellogg Co (K.N) report quarterly results over the next several weeks.
"Promotion is going to show up in the form of pretty sluggish (sales) growth numbers," said Edward Jones analyst Matt Arnold, who follows some food companies, as well as Wal-Mart and other retailers.
For a graphic on key data for CPG companies, please click: here
P&G, KRAFT PROFIT EXPECTED TO DROP
Among large manufacturers, P&G and Kraft Foods Inc (KFT.N) are both expected to post lower earnings per share in the quarter, according to Thomson Reuters I/B/E/S, with the impact of promotions and the falling euro hurting results.
At the end of the quarter, the euro shed more than 11 percent against the U.S. dollar compared with a year earlier, a negative for companies with significant sales in Europe.
Bleach maker Clorox Co (CLX.N) and Marlboro cigarette maker Altria Group Inc (MO.N) are expected to have about flat earnings, while beverage makers Coca-Cola Co (KO.N) and PepsiCo (PEP.N) are expected to show increases.
Despite price pressures and the impact of the euro, packaged goods stocks have been living up to their billing as "defensive," meaning they do better than the overall market in a rough economy.
The Standard & Poor's Consumer Staples index .GSPS has lost 3.9 percent over the past three months, but that is still better than the performance of the wider S&P 500 .SPX, which is down 9.5 percent over the same period.
U.S. consumer prices fell for a third straight month in June, while consumer sentiment dropped to an 11-month low in July, underscoring the soft nature of the economic recovery. But excluding volatile energy and food prices, core consumer inflation rose 0.2 percent, easing concerns about deflation.
Still, some companies expect the pressure to discount will continue.
"As we look at fiscal (year) '11, quite frankly, we still see a difficult environment," said Campbell Soup Co (CPB.N) CFO and COO Craig Owens at an analyst meeting this week, citing pressure on the consumer. "In a pretty moderate inflation environment, pricing will continue to be very difficult to realize and the top line will continue to have to be volume driven."
Others see some improvement, but say it may take months.
"While pricing may be slightly negative for the next quarter or two, we don't see this as a long-term headwind to organic sales growth," Procter & Gamble Chief Financial Officer Jon Moeller said at a conference in June.
Once P&G's pricing improves, rivals are likely to follow, said John San Marco, an analyst with Janney Montgomery Scott.
When General Mills Inc (GIS.N) reported earnings last month, it said its fiscal 2011 plan assumed a 4 percent to 5 percent increase in supply chain costs. General Mills said it would help account for those costs with increased productivity, a strategy it successfully implemented for several quarters.
Analysts said rising inflation could also help manufacturers justify easing up on promotional spending in their negotiations with the largest retail chains.
Retailers may have their own reasons to take promotions down a notch. Walmart's U.S. same-store sales have fallen for each of the past four quarters, in part because it pushed prices lower to win consumers back from dollar stores.
But as investors are anxious to see Walmart turn around its sales in the United States, some analysts have pointed to the possibility that prices could go up, at least a little, on some products.
A Walmart spokesman would not comment on how wide or deep the company's next round of rollbacks would be.
"Walmart would welcome a little inflation in their system," said Edward Jones' Arnold.
(Additional reporting by Emily Stephenson in Chicago; editing by Michele Gershberg and Andre Grenon)
(Reuters) - Gold steadied on Wednesday after rising nearly 2 percent the previous day when worries over debt problems in the euro zone bolstered the metal's appeal as a haven from risk and a currency alternative, but high price levels may prompt selling.
Market players appear to have found a consensus that prices below $1,200 per ounce were a bargain, but have yet to unconditionally accept levels sustained above $1,250.
Investors may be reluctant in the near term to aggressively buy gold at current levels, but worries over the global economy, expectations the Federal Reserve will keep its extremely accommodative monetary policy for some time to come, and concerns over euro zone debt problems spreading are underpinning prices.
Compared to three months ago, support levels have risen by about $50 and it is just a matter of time before a new upward range is set firmly, said Koichiro Kamei, managing director at Tokyo-based researcher Market Strategy Institute Inc.
"Gold's underlying appeal as a currency alternative and a hedge against risks is deep-rooted and will stay so over the longer term, as there is nothing to threaten it imminently," he said.
"Another huge support for the market is a wider investor base, as shown in growth in investment in exchange-traded funds," Kamei said.
Spot gold was at $1,210.70 per ounce as of 0515 GMT (1:15 a.m. EDT), little changed from late New York levels of $1,210.65 an ounce.
Gold prices hit record highs in late June as concern over European sovereign debt levels and instability in the broader financial markets helped sustain a boom in safe-haven investment.
Spot gold hit a record high of $1,264.90 an ounce on June 21. It rose to a one-week high of $1,217.60 on Tuesday after debt rating agency Moody's cut Portugal's rating.
U.S. gold futures for August delivery were at $1,211.20 per ounce, compared to $1,213.50 an ounce on the COMEX. They reached $1,218.80 on Tuesday, their highest since July 1.
Holdings by the world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P), stood unchanged at 1,314.819 tonnes as of Tuesday, after rising for the first time since late June on Monday. A small rise in volume suggested caution by investors toward buy at current levels.
On the other hand, the world's largest silver-backed exchange-traded fund, the iShares Silver Trust, said its holdings climbed to 9,185.29 tonnes as of July 13, up 33.51 tonnes or 0.4 percent from Monday.
The euro held steady near a 2-month high against the dollar, having jumped nearly 1 percent the day before. Easing concerns about funding pressure in the euro zone, optimism over corporate earnings and bullish charts technicals were likely to support the single currency.
Japan's Nikkei share average .N225 extended gains to rise 2.7 percent, with chip-related shares powering higher after Intel results beat expectations, easing fears about the U.S. economic recovery. .T
Among other precious metals, spot platinum edged down 0.1 percent to $1,522.75 per ounce from New York's notional close of $1,524.50.
(Additional reporting by Risa Maeda; Editing by Joseph Radford)
(Reuters) - Deborah Coleman lost her unemployment benefits in April, and now fears for millions of others if the Senate does not extend aid for the jobless.
"It's too late for me now," she said, fighting back tears at the Freestore Foodbank in the low-income Over-the-Rhine district near downtown Cincinnati. "But it will be terrible for the people who'll lose their benefits if Congress does nothing."
For nearly two years, Coleman says she has filed an average of 30 job applications a day, but remains jobless.
"People keep telling me there are jobs out there, but I haven't been able to find them."
Coleman, 58, a former manager at a telecommunications firm, said the only jobs she found were over the Ohio state line in Kentucky, but she cannot reach them because her car has been repossessed and there is no bus service to those areas.
After her $300 a week benefits ran out, Freestore Foodbank brokered emergency 90-day support in June for rent. Once that runs out, her future is uncertain.
"I've lost everything and I don't know what will happen to me," she said.
The recession -- the worst U.S. downturn since the 1930s -- has left some 8 million people like Coleman out of work.
Unemployment has remained stubbornly high at around 9.5 percent. According to the U.S. Bureau of Labor Statistics, in June 6.8 million people or 45.5 percent of the total are long-term unemployed, or jobless for 27 weeks or more.
Before the recession began in late 2007, the unemployed received benefits, usually a few hundred dollars a week, for 26 weeks or around six months after losing their jobs.
Under the federal/state programs, which are administered by state governments and partly funded by taxes on business, only full-time workers are eligible for benefits. Within federal guidelines, benefits and eligibility vary from state to state.
As the downturn left more Americans out of work for longer periods, Congress voted to provide funding to extend benefits to as long as 99 weeks in some areas.
Some critics say this adds to the country's large fiscal deficit, and may even discourage job-seeking.
FOOD BANKS FEAR STRAIN
An attempt to pass another extension has become bogged down in partisan political bickering in the Senate. Relief agencies fear that failure to extend benefits will strain their resources and may worsen the U.S. housing crisis.
"This will put a great deal of stress and strain on our organization, which has already been working hard," said Vicki Escarra, chief executive of Feeding America, which has a network of more than 200 food banks. In the year ended June 30, Feeding America distributed 3 billion pounds (1.36 billion kg) of food, a 50 percent increase over the past two years.
The benefits debate has pitted the majority of Democrats against most Republicans and some conservative Democrats.
When the House of Representatives passed a $34 billion benefit extension on July 1, 11 fiscally conservative Democrats voted against it. The Senate may take up the issue again in mid-July, but Republicans like Senator Tom Coburn have argued any extension must be paid for with cuts elsewhere.
"Even then he (Coburn) is not sure if that's a good idea," said John Hart, a spokesman for the Oklahoma senator. "The longer the unemployed have benefits, the less incentive there is to find a job."
Most economists argue that cutting benefits could slow recovery, describing benefits as direct economic stimulus because almost every penny of it gets spent. In a June 28 client note, Goldman Sachs said if all additional U.S. stimulus spending expires, it could slow the economy up to 1.5 percentage points from the fourth quarter 2010 to the second quarter of 2011.
The note added that extending unemployment benefits and a $400 tax credit would "substantially mitigate" that impact.
3 MILLION CUT OFF IN TWO MONTHS
During the Senate impasse, from the week ended June 5 to the week ended July 10, more than 2.1 million Americans lost their benefits. Another million will join them by July 31.
In Ohio alone, where unemployment stood at 10.7 percent in May, more than 83,000 people lost their benefits in June.
Sister Barbara Busch, executive director of non-profit housing group Working in Neighborhoods in Cincinnati, 65 percent of the people who come seeking help with their mortgages are unemployed or underemployed.
"I fear once the benefits run out, I suspect we'll see a new wave of foreclosures," she said. "I just hope I'm wrong."
Ohio is a bellwether U.S. state in elections. The state's Democratic attorney general Richard Cordray said blocking extending jobless benefits was politically motivated ahead of the midterm elections in November.
"If people lose their benefits they will blame the congressional majority and the administration," he said. "As unappetizing as it is, that would appear to be the strategy."
Senator Coburn's spokesman Hart said suggestions the Republicans were playing partisan politics were "ludicrous."
"The Democrats say that because they want to avoid making the hard decisions," he said.
Alonzo Allen, 55, a former aid agency worker in Cincinnati whose benefits will run out in September, spends two days a week volunteering at the food bank in Over-the-Rhine and the other three looking for work. He said he worries about the one-bedroom apartment he rents and how he will feed his dog Ginger, who is the "only family I have."
"If the benefits stop, I'll be out on the street and I'll lose all my furniture," he said. "That's going to be tough."
Markets continue to trade at their unhurried summer pace with no signs that we’ll encounter any directional momentum today. The highlight of yesterday’s trading day was the BoE MPC Posen addressing comments advanced by S&P regarding the UK’s cherished AAA sovereign rating. S&P asserted that UK debt levels were approaching levels incompatible with their AAA rating. Posen later addressed fears that the UK could fall back into economic recession and further warned that recent austerity measures across the EU could weigh on the UK’s fragile recovery.
Should the UK government fail to develop a concrete strategy, the nation’s risk-free rating could be in jeopardy – something we’ve seen quite a bit of in the EU. As can be expected, the GBP has come under noticeable selling pressure. Sterling continues to struggle with the market’s shifting views on the inflationary path set by the BoE holding rates low and steady for an extended period of time. The ill-timed comments by S&P just exacerbated GBP selling mostly due to apprehension already present in the marketplace.
In the near term, we expect GBPUSD to be sold on any rallies as MPC members fail to follow Sentence’s call to raise rates and the fact that sovereign debt fears will likely cloud any positive developments.
In the Eurozone, recent ECB data demonstrated that the central bank only purchased €1 billion worth of Eurozone bonds as part of its Securities Market program. The figure represents a significant deceleration in bond intervention and potentially signals a quazi-return to normalcy. Portugal was downgraded today by Moody’s to the A1 level with a “stable” outlook for the future.
Fitches holds Portugal 1 notch above A1 while the S&P relegates the small nation 2 levels below. While the “stable” outlook should calm markets, the initial knee-jerk reaction sent the EURUSD down 25 points. Portugal’s growth is likely to remain weak until structural reforms are implemented and effective.
Lastly, Greece is due to auction off €1.25bn of its own debt today on the open market. Should the rate close below 5%, this would be a positive sign of returning investor confidence and broadly Euro positive.
EurUsd We are still short EURUSD after the rising wedge formation was activated last week (around 1.2650), and thus far the sell-off has played out nicely to touch a low of 1.2543 (albeit a brief touch). As discussed in yesterday’s report, we set a target for this break out at 1.2510-20 (to give some cushion ahead of the 1.2483 support where the pair bounced on 2 & 6 Jul), but there is now good cause to expect further downside is possible. Looking at the hourly chart, there is a head and shoulders pattern being carved out with a neckline approximately 1.2550 (7 Jul low 1.2553), so we would actually look to add to longs on an hourly break below there. The target for this pattern (measured as the height of the head applied to the point of the breakout) should be 1.2390, however given this is only a few pips shy of the 50-day moving average (1.2387) and behind the psychological support 1.2400, not to mention the scene of some previous highs in the last week of June, we would happily take profits early around 1.2420. Should the pair bounce off the neckline on the first attempt, resistance is eyed at 1.2614 overnight highs, 1.2650, 1.2722 (Friday’s high), then 1.2937 (100-day moving average).
GbpUsd After plunging to lows of 1.4949 early in yesterday’s European session (9 pips short of the bearish break-out target), GBPUSD squeezed all the way back up towards its former range floor of 1.5080 –fantastic news for those who left for the weekend early on Friday and missed the break-out first time around. We have added to shorts back up there, and thus far the bearish strategy is paying off well. As noted yesterday 1.4930-40 is a very manageable first target, with further downside easily possible.Next support is eyed at yesterday’s low 1.4949, 1.4874 (1 Jul low), with another cluster of support around 1.4850-55 (23 & 25 Jun lows), and the 100-day moving average 1.4983. Sellers will almost certainly appear again back towards the old range floor of 1.5080, and once again at the back side of the former uptrend 1.5170.
UsdJpy We’re still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since yesterday morning’s promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering around the mid-88s for much of the last few sessions, with 88.35-40 acting as a supporting area of buying interest in the interim. As we foresaw yesterday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.35, so we may end up having to settle for a slightly lower take-profit level depending on how the price action plays out. Should the move have the momentum to burst through the 1-month downtrend next resistance beyond lies at 89.50 (28-29 Jun high), and 90.61-76 (resistance zone containing the 25 Jun highs, 50-day and 200-day moving averages). Nearest supports expected at 88.20 neckline, 88.00, then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this morning’s rally looks to threaten the 1-week downtrend channel. Significantly we have managed to take out resistance clustered around 1.0580 that represented the neckline of a possible double bottom, and now the skies are clear for a revisit of 1.0700 levels. Buying on dips towards 1.0580-1.0600 now looks to be the smartest choice this week, but watch for progress to slow in the upper echelons of the 1.06-handle. It is unlikely the pair is going to break above 1.0700 on the first go so bears will look to sell more back up there, knowing that further protection lies just behind at 1.0750-70.
