Market Comments

The risk-seekers wheeled out fresh funds to plow into the market on Friday, with rather predictable results across markets: stocks and commodities up and bonds down. This translated to USD and JPY falling in the currency market, and the commodity currencies, Scandies and Euro catching a bid. While the response is no surprise, it is perhaps worth noting that the response in the USD is weaker than it has been in the past. For example, the S&P500 peaked at around 90 in early June, when EURUSD peaked out around 1.4335. Now we've seen a spectacular 19% rally from the July trough to current levels over 1025 and the EURUSD is trading at about the same level. The more risk-loving AUD has been a stronger performer, but is still up less than 2% above it's June high despite the massive rally in stocks. For Aussie, it is clear that an interruption in the former Chinese equity market parabola on all of the troubling rumblings about a potential Chinese asset bubble and the authorities attempts to deal with it, have dampened enthusiasm somewhat. Still, the bulls are still trying to bid the currency up for new highs versus the market since the mid-August peak and possibly challenge the pivotal 0.8500/20 area.

This week's economic calendar is relatively light. The highlights this week include the US confidence numbers on Tuesday and Friday and the German IFO on Wednesday. Here's a brief run-down of the salient events for the rest of the week:

Tuesday

• Final Q2 GDP figures from Germany - no change expected to 0.3% QoQ initial reading. Positive growth, but still down over -7% YoY
• Switzerland SNB's Hildebrand and Jordan to speak
• US Jun. CaseShiller/S&P500 House Price Index - the data is a bit old for this survey...signs are that prices are stabilizing, but delinquencies are still rising and 30% or more of mortgage holders are under water (owe more than their houses are worth). Any talk of a real housing recovery is impossible.
• US Aug. Consumer Confidence - one of the real indicators that suggest stock markets should tread carefully. Confidence is still very low - and the average consumer still has a lot of deleveraging to do.
• US Weekly ABC Consumer Confidence - the most leading of the confidence surveys, though it garners less attention than it should

Wednesday

• Germany Aug. IFO - much like the US confidence numbers, this important survey, which normally correlates well with the equity indices, has failed to rally anywhere near as much as risk appetite in general, suggesting a disconnect in the real state of expectations and the "supposed" state as expressed in the stock market.
• US Jul. Durable Goods Orders - a volatile figure, this one has recovered fully after near record breaking weakness during the fall/winter meltdown. The year on year comparisons remind us where we came from however: ex transportation durable goods ran at a -22.2% clip for the June numbers.
• US Jul. New Home Sales - the disparity between the weak recovery in New Home Sales and the strong bounce in Existing home sales shows that activity in existing home sales has a lot to do with bargain prices and distressed sales and the fed tax credit for first time buyers that expires December 1. New Home Sales are a better indicator of the state of housing.
• US Crude Oil and Product Supplies - this has become a more interesting number than usual after last week's enormous drop in inventories and with crude oil trading close to the highs for the year. Supplies are still plentiful relative to historic norms.

Thursday

• New Zealand Jul. Trade Balance - the high-flying kiwi is the country's worst enemy with its reliance on commodity exports, especially with still relatively depressed commodity prices
• Germany Aug. CPI - no signs of inflation just yet...ECB also more cautious than in cycles past on the prospects for recovery
• US Q2 GDP - 2nd revision. The US Q2 GDP looked much better - but a lot of that improvement was driven by anemic consumption that brought down import levels. Is reduced trade due to reduced consumption a sustainable path to GDP growth, we ask rhetorically...
• US Weekly Initial Jobless Claims - last week a disappointment. Another disappointing reading is certainly cause for concern for the bulls, but as we have said - wait till late September to get more significance form these weekly figures.

Friday

• 
  UK Aug. GfK Consumer Confidence Survey - UK Confidence has bounced about halfway back to where it came from before the crisis.
• Japan Jul. Jobless Rate, CPI, Household Spending - the big Friday batch of data that arrives in the last week of every month. Markets more interested in upcoming Aug. 30 election and the direction in risk appetite - particularly in the long bond.
• UK Q2 GDP - 2nd estimate
• EuroZone Aug. Confidence Data
  Canada Q2 Current Account
• US Jul. Personal Income/Spending - spending levels are back to unchanged on a month-to-month basis, the moving average in incomes is of more concern - especially with so few still working...
• US Jul. PCE deflator/core - the core price index is a few tenths of a percent from 50 year lows - are we headed there?
• US Aug. Final University of Michigan Confidence - the ugly initial reading touched off a brief swoon in risk appetite before it recovered. Confidence matters! President Obama's approval ratings are also weakening, though that could be a symptom of the highly controversial healthcare reform issue.

The pound has traded sharply weaker vs. the Euro - apparently on the continued fall out from the BoE's King and the other two MPC members who also voted for an even large expansion in the asset purchase program. 0.8700 is a critical level in EURGBP. GBPUSD, meanwhile, remains tied up in a tight range.

USDCAD is punching through to new lows today on the strong (if ancient....) retail sales data from June and more importantly the general risk appetite picture and strong rise in oil prices, which are now challenging the highs for the year around 75 dollars a barrel.

Our outlook for the present remains relatively unchanged: the recent action has rejected the bears case for a larger correction lower here in risk appetite and all that entails in a stronger USD and JPY. Nevertheless, recent action has shown that the range may hold if we allow for a bit of slippage. So we could see yet another attempt to new extremes that has been typical of the action both ways (the market trying to get a new move started, only to see that move rejected). We prefer to be on the look out for a reversal at any time rather than boarding the risk train at this time.