The magazine includes the following articles this month:

Global Equities: Ouch! – What now?

China: Not time to get nervous – yet

India: Stimulus is running out, can growth compensate?

Foreign Exchange: Investment flows or economic data?

Hot Topic: Inflation or deflation – Do I hear deflation?

I hope you will enjoy reading the magazine.

Peter

The results I have noted in my dairy to watch out for in January are:

Date Corporation

19th IBM
25th Royal Philips Electronics
26th Catarpiller Inc.
        DuPont
        Johnson & Johnson
        Novartis AG
        Siemens AG
27th SAP AG
28th Eli Lilly
        Microsoft

More will of course follow in February, but those I mention will give an interesting picture of the current condition. The pharma companies I see as important because they most likely will come with good results, helping to a general happiness in the market.

The new issue is getting distributed right now.

This month is it includes the following subjects:

Global Equities with ”Unemployment – lower numbers needed”, “Hello Japan – are you awake ?” and “The most important Q4 earnings this month”

China with ”Cooling down the housing market”, ”confusion about the stimulus package” and ”Renminbi – Explosion ahead”

Foreign Exchange covering the major currencies and FX volatility.

India covering the rising inflation, the capital inflow and the risks for stock market.

The Hot Topic this month is global debt – Hopefully not a Japanese headache.

I hope you will find a few minutes to look at the magazine

Best regards

Peter

The first 9 month GDP growth this year is so far reported as 7,7% (year on year) but will most be revised up. It actually means that China is about to overtake Japan as the second largest economy in the world.

For many it is not a surprise and the market didn’t react on the news today. Long term it should be noted as it confirms the steady picture of the Chinese economy, that the service sector grows faster than expected and the growing global importance of the economy. Another argument for having Chinese stocks in the portfolio and manage them actively.
The short term focus in the Chinese market is still on the confirmed ongoing loose monetary policy – positive impact.
Peter

The Chinese monetary policy is important but the US numbers we had yesterday are more important. How should we judge them ? Both personal income and spending went up but not as much as expected. Again a sign for me that the world is finding a new level of activity but not the fast rebound that is priced in the equity markets.

The housing data was more worrisome with the November new home sales that plunged 11,3%. This is actually the lowest level since March. Like I wrote in the last comment, then I watch the US housing market very closely. In total, I still only see a sort of stabilization but not the

rebound that the market is hoping for.
A positive market is of course good for many people so it is fine for Christmas. The blog is open during the Christmas holidays so I will be back tomorrow.

Peter

Peter

Some say that the rebound is on track, I judge it more like stability, like mentioned several times. The domestic demand is pushed and forced higher by the public stimulus package. That the domestic Chinese demand is growing stable will not help the rest of the world, as the outside world cannot produce as cheap as the Chinese companies can. There is no “save the world effect” in these numbers. The higher import is more due to higher commodity prices, so no happy days there.
It leads to the inflation number, higher than expected (+0,6% y/y). Also in China many have pointed at the very loose monetary policy and the risk of higher inflation. So far the change from deflation to inflation was only caused by higher food prices. That has never been seen as positive in any country, and one should keep an eye on this, as food inflation in China is very critical.
The last, but very important export data, disappointed (-1,2% y/y). More was expected based on the hope of increasing global demand.
It still gives me the ongoing picture of China being stable, partly due to stimulus, and not rebounding in any significant way. The global demand is still on hold and that inflation is coming to town just before Christmas – watch India as well.
The bulls are still in the lead and will try to use the above numbers as a buy opportunity, but it should be over by Monday. The numbers are not a reason to buy more stocks, sorry to say.

So Dubai took the center stage all of a sudden, but how should we treat it ? We all know the short term logic consequence some developers, private investors and banks will lose money. Probably are the banks the most hurt as they regarding all debt in Dubai as quasi sovereign supported, but it was not.

Apart from these very direct losses the Dubai problem shouldn’t affect the world in any particular way, unless the financial markets are in some sort of stress. But they are and that’s why the reactions are so negative. For me it shows that the upside momentum in the global equity markets is getting more and more heavy as all coming positive news already are priced in.

The Dubai meltdown also gives the markets a lead for next year, as next year will be a reality year and not a boom year. The markets have priced the swift turnaround in but if we are lucky growth will be flat in 2010 with a recovery in 2011. Next year will about coming through and survive in a credit strapped environment. This means that only corporations and banks with healthy balance sheets, some cash and a decent business will run ok in 2010. All banks globally have rebounded 300 – 400 % since the lows earlier this year and at the same time the bad debt continues to grow. It’s a bad cocktail and mainly it’s the same picture for all listed companies. Repayment of debt will become an issue in 2010 combined with zero or low growth.

The Dubai lesson in my view is to go through the stock portfolio is December and quit the stocks with a too high debt ratio compared to earnings and equity. They will be too risky next year.

Data published by National Bureau of Statistics of China lately confirmed that the world’s 3^rd largest economy is on track.

Retail sales gained a 16.2% year-on-year increase, which is 0.7% above the figure of last month. Some economists hold the opinion that China’s economy rebound is mainly due to its huge stimulus package. This mainly drive up its fixed investment, and this kind of economic growth mode is not sustainable when government retreat from this huge economy. The steadiness in the private consumption gives the economy a long-term momentum which we notice as a positive factor.

Very important was the industrial output that recorded a 16.1% increase, which is the highest during the past 19 months. What should be paid more attention to behind this increase, is some other key related data. The PMI, which empirically should be lower due to the seasonal factor, increased to a year-high of 55.2. Especially the data on PMI showed a substantial decrease of the inventory of completed goods. All the data confirmed the potential expansion of factories’ production.

 Last but not least, the export, though still fell 13.8% year-on-year, is the smallest decrease in 10 months. As the Chinese government has publicly reinforced its determination to hold its exchange rate unchanged and the global economy is alive gives investors even more appetite on the export companies.

 No doubt that all the data will give renewed happiness in the stock market. Though it should more be taken as a stable story than a train to jump on.

During the last month I have explored some technical problems which I apologise. I have have been working on some changes as well. The new updated version of the blog I expect to launch in mid December. The comments goes on as usual.

Best regards

Peter

Central bank rates – What can they do? Print more money…..

US Federal Reserve Bank: Quantitative easing……

Bank of England: Now at 1,00% with a good chance that they will cut again. 

European Central Bank: A surprise cut with only 25 basis points, but another 25 basis points will come very soon, down to 1,00%.

Bank of Japan: 0,10% – that was it.

They will be posted tomorrow Thursday.

Technical problems for a couple of days – apologise.

Best regards

Peter

Central bank rates – they give it another try at ECB……

US Federal Reserve Bank: Now Fed is at 0 – 0,25%. Next step is intervention in Treasuries. Fuelling money supply……

Bank of England: Now at 1,00% with a good chance that they cut again. 

European Central Bank: Next cut is on Thursday to 1,50% from the current 2,00%.

Bank of Japan: 0,10% – that was it.

Central bank rates – The next in line is ECB

US Federal Reserve Bank: Now Fed is at 0 – 0,25%. Next step is intervention in Treasuries. Fuelling money supply……

Bank of England: Now at 1,00% with a good chance that they cut again. 

European Central Bank: Next cut in mid March to 1,50% from the current 2,00%.

Bank of Japan: 0,10% – that was it.

China – many hope that the year of the Ox will be better.

Hang Seng (15.478)  Shanghai B (114)  USD/CNY (6,8340)

It’s obvious that many are hunting opportunities from the start of this year, so here is one more for hungry investors.

A survey conducted by The Nikkei Veritas and Nikkei Research among 76 market analysts showed that 75% expects a rebound in Chinese stocks (55% pointed at a rebound in Japan as no. 2 opportunity).

As always, I agree that when the world turns around one need to be long Chinese stocks. As an extra upside the domestic demand growth will boost Chinese stocks even further when it comes.

As mentioned under the equity comments that the positive expectations maybe are priced in already. For some weeks ago I referred to fund managers who during last autumn have become over weighted in Chinese stocks – in a bearish market, it is too early…….

Out of leading countries is China doing the most to help the economy, but mainly turning it from a very export elastic economy to upgrade the domestic demand. It’s not a western like economy so how long time it takes is simply unknown.

One thing that should worry investors is the uncertainty about the big rescue package announced last year. It is under way, but so far more in headlines than in details and action. In the meantime the economy is worsening and it might be necessary with more initiatives than the stimulus package and rate cuts.

I fear that the Chinese government could intervene in the Chinese banking sector by forcing them to lend more to private households. In China this is easy done as the Communist Party could just tell the finance body and the banks to disregard regulation and risk targets. Some might say that it sounds crazy, yes but it’s a more likely situation than you believe.

The risk is so big that I would not hold shares in Chinese banks. Banks also has some weight in the Chinese stock indices, so in case banks are forced to lend more to private households (leading to bad loans) the different indices will come under pressure, making the largely expected rebound difficult.

A lending spree should support consumer stocks. They also might get help from the start of the year as the consumer spending in China during the first 3 days of the year was up 13% year/year.

I remain in a wait and see position and will wait until we have some true good news. Right now the markets have priced too much upside in.

Some hope on the Ox but the year of the Rat remains for another 3 weeks……. J

Targets: Hang Seng 11.000     Shanghai B 90

Central bank rates – Cutting as much as possible, and then what?

US Federal Reserve Bank: Now Fed is at 1,00% and Tuesday evening they are at 0,50%, maybe even 0,25% (I go for 0,50%). Going below 0,50% is very difficult as money market funds will create a negative return. Despite the money market funds a zero rate is in the cards. Trying to repair a credit bubble that exploded by getting credit rolling.

Bank of England: They will drive it as low as possible – to American and Japanese levels. 

European Central Bank: Very quickly taken down to 2,50% so now will Mr. Weber needs some time to digest. Further cuts are already priced in and also likely, but slowly towards 1,50% or 1,75% in 2009.

Bank of Japan: 0,30% and they might even cut again, but of course it won’t change anything.

Stocks and the Dollar are going up and down

China is covered every week but after the official announcement about the stimulus package over the weekend I found China a natural Hot Topic.

Please share your view on my comments her below.

China – turning into a US alike economy.

Hang Seng (14.745)  Shanghai B (100)  USD/CNY (6,8255)

The Chinese stimulus package certainly is good news, particularly on mid- to long term horizon. The frequent reader of the China comments will find similar components in the stimulus package and the solutions discussed in the weekly comments. I can only agree in what the Chinese government is doing.

The nearly $600 billion package represents 14-15% of GDP over the next 2 years which is significant. Only some headlines about where the money will be allocated have been disclosed. Very wisely they invest even more than planed in infrastructure in rural areas. Apart from boosting the economy the government also makes it possible to move or establish new factories in these areas where salaries are lower.

It is still uncertain if the stimulus package is new spending or it includes the public spending that already was planed, this is important information that still is missing. Secondly is a precondition for success that the spending isn’t counterweighted by higher taxes, and the government must borrow the money, not finance the spending by selling assets like real estate.

Very fair that Chinese stocks went up on the news, particular within the sectors that benefit directly. The same about Japanese companies in these sectors, because they tend to be very well positioned in China. Some of the global players in infrastructure are happy as well.

That Chinese B shares rises more than the A shares for domestic investors could be an indication that investors globally already are over shooting on the news. Another reason is that I have a feeling about some being short Chinese stocks (fundamentally very wrong).

As so many things here in life there is a flip side of the coin. I heard some comments this morning where some speculate that China is worried about the global economy.

They are worried if the global problems hurt domestic China. I can only repeat that the Communist Party is deeply worried about the domestic economy and it’s where the attention is.

The talk about a stimulus package was already circulating last week, where a number of $732 billion was mentioned. The comments made by an official also said that China seems to be in an “excessive economic slowdown”.

Other reports tell stories about all the rural migrants in the large cities who aren’t legally registered. It might sound like a minor problem, but estimates say that it’s 130 million people we are talking about (yes, 130m).

Very suddenly the demand for their labour force has dropped and they are now trying come back to the rural areas where they come from, to even lower salaries, if any.

These numbers and the problems are not unknown to the Communist Party. The migrants now can build roads, railways etc. in the areas where they origin from.

It all gives a more balanced picture, meaning the spending plan will compensate for some missing incomes elsewhere. But as mentioned in the start, it will boost some sectors and is overall positive.

The most positive effect is mid- to long term, as the Communist Party turns the Chinese economy to be domestic US alike demand driven.

The Chinese stock market still is very speculative and not like the Western markets, but there is good a chance that China will become the global growth engine. It’s why I spend so much time on China J

As usual I believe the first market to reverse is China mainland, Hong Kong, partly Japan, India and some other Far Eastern markets. The only reason why I still don’t recommend to buy China and Hong Kong is the bearish global outlook. Though, the latest initiative from the Chinese Communist Party makes it even more important to watch China.    

We might have seen the lows in Hang Seng and Shanghai B, but I keep the targets due to the global outlook.

Targets: Hang Seng 11.000     Shanghai B 90

Best regards

Peter

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Global equities:

Nikkei 225 (8.577)  Topix (867)  Dax (5.013)  FTSE 100 (4.374) Dow Jones (9.325)  S&P 500 (969) Nasdag Comp (1.721) 

No doubt that some of the buying last week was caused by a rebalancing effect where several funds needed to buy stocks due to predefined allocation ratios.

It makes the buying spree last week more difficult to evaluate but it’s very clear that some bought stocks with the argument that we can see an end of the crises. Or with other words, in 1 year equities are higher. Last week wrote about the good news, that some now was forecasting an end of the crisis in May or June next. I had never imagined, that so many investors all of a sudden speaks about “after the crisis” before we really have started. This crisis is not just a small blip, but described as the worst since 1929.

I surely respect rebounds after such dramatic sell-off’s. The magnitude of investors going long stocks before we have any idea about how serious this gets, is a surprise for me. Since spring global growth has dropped – nothing new – but looking at numbers and expectation indices, I expect demand to have stopped more than we can believe during September and even more during October.

I keep the targets as I think the current uptrend is too early and with the earning season fading out fundamentals will have higher importance in the coming period.

From Japan we become the October vehicle sales on Tuesday and Thursday is the leading economic index for September released (expected 89,2). Like mentioned under EUR/USD, the major number this week is the US unemployment data on Friday.

From UK we have the September industrial production on Wednesday (expected -0,3%) that I watch a lot. From Germany I watch the September factory orders on Thursday (expected -5,2%) as pretty important.

My feeling is that all the above fundamentals will be bearish for equities despite the current positive mood.

The rate cuts from ECB and Bank of England should be priced in unless it’s 100 basis points from Bank of England – I don’t believe in that.

Only a few of the important earning results, but Tuesday I look at Tesco from UK and BMW Group AG from Germany. Thursday in Japan it’s Toyota, Deutsche Telekom AG in Germany and Walt Disney in US. Friday Ford Motor Company could be interesting, but bad news are priced in. 

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (7730)  S&P 500 (820)  Nasdaq Comp (1489)

Currency markets:

EUR/USD (1,2800): EUR/USD is still more a function of investor risk appetite and stock markets than fundamentals and short term rates. It might change a bit with the rate cut from ECB on Thursday. Far East investors are less and less attracted by EUR as short term rates fall, meaning this support for EUR continues to fade out. It brings fundamentals more in the limelight, but the discussion is of course about in what economic zone the fundamentals are worst…..We have negative growth rates and/or negative outlook from all governments, but I still claim that the steepness of the downturn is strongest in US. It will lead to some Dollar selling but that force is not in play yet. The growing risk appetite within the last week gave some upside to EUR/USD which I find is a dangerous game. In the equity part I argue for renewed selling pressure in stocks, meaning I need to accept the downside in EUR/USD due to the current market behaviour. Based on the different factors, then a move down to the 1,2350/1,2500 area is what I expect as the next move. I am not comfortable with this view, but it’s in respect of the market. Regarding the US presidential election is Mr. Obama’s victory priced in. I think the market reaction will come when we learn more about the coming fiscal policy. Apart from the election I regard the US labour market data on Friday as extremely important (expected 6,2%).

Target: 1,2400. 

EUR/GBP (0,8000) – GBP (1,5925): In GBP/USD, a base building around 1,5500 I worth to keep an eye. I can’t imagine anything good in the fundamental outlook of the UK economy but a lot of bad news are priced in. The capital flow out of UK might not be finished yet, and we need to wait for the UK rate cut on Thursday. I keep the targets, but I consider the 1,5500 level as interesting but if  GBP/USD drops it depends on the market behaves in case. Like for equities the industrial production on Wednesday is very important (expected -0,3%)

Targets: EUR/GBP 0,8050 – GBP/USD 1,5500.

EUR/JPY (126,10) – USD/JPY (98,80): Wild swings in JPY as usual, but the targets was reached and the rebound came, though higher than expected. I keep the targets as a stronger Yen fits into the other expectations to the markets. The fundamental data mentioned as important for Japanese equities of course are interesting for the FX market as well, but not as important. The capital flows, particularly from equities are the one to follow. The 90,00 in USD/JPY I regard as extremely important (and a target). 

Targets: EUR/JPY 113,00 – USD/JPY 90,00.

China:

Hang Seng (14.344)  Shanghai B (89)  USD/CNY (6,8380)

Last week I forecasted that Shanghai B and Hang Seng should rebound. Shanghai B is, a bit surprisingly, 2% lower but Hang Seng certainly came up with +30%, and even higher from the low……..

Shanghai B partly reflects the sluggish domestic A share development, but it doesn’t correspond with the optimism among some investors around the globe. In China a global slowdown is hugely priced in, so if global stock markets go up on growth expectations then China needs to rebound as well. Otherwise, the world will come down again. 

Hang Seng is a different story with the extremely large rebound. I need to admit that some of the missing China rebound came through China mainland stocks that are included in the Hang Seng index.

The difficult economic news from China continues despite the Chinese holiday week in early October, where spending seemed to be ok. A long range of Chinese companies have reported about output drops, the purchasing managers index was 44,6 in October against 51,2 the prior month, different newspapers bring stories about how Sothern China production plants feels the global drop in demand of consumer goods.

As mentioned several times is the Communist Party with good reason is very worried about the economic outlook. More rate cuts will come and today lending quotas for commercial banks was removed. More initiatives surely are underway to spark the domestic demand.

As mentioned last week, I now regard last Monday’s close as the target in Hang Seng. We might have seen the lows in Hang Seng, but I believe the trend will turn again and trade towards 11.000. Shanghai B I think will trade sideways. It’s a fairly speculative index, but many negative factors are priced in though based on the global environment it’s too early to buy.  

Targets: Hang Seng 11.000     Shanghai B 90

Central bank rates

US Federal Reserve Bank: Now Fed is at 1,00%. They might cut again but going below 0,50% is very difficult as money market funds will create a negative return. This would create too big problems is view.

Bank of England: They cut from 4,50% to 4,00% on Thursday. I don’t believe in 100 basis points to 3,50%.  

European Central Bank: Also a cut with 50 basis points on Thursday – expected and priced in the market.

Bank of Japan: I didn’t believe they would lower the rate, but now they did. The 20 basis points down to 0,30% do not change anything at all.

I am looking forward to your comments and wish everybody a profitable week.

Peter

The oil price is not a concern anymore, so why regard the lower oil price as a risk and not an opportunity? Right now some in the equity markets believe in a soon end of the global crisis. If this is the case, then oil demand should jump sending the price much higher, that again contracts global growth before growth got started. Intuition says that the oil market isn’t balanced leading to a risk for new big swings in the oil price, growth and stock prices.

Another reason to check oil is the yearly annual report from IEA later this month.  A draft version is apparently circulating among some journalists. It contains information that should worry oil consumers and global growth hopers.

Until the world stopped booming ½ year ago, the market had a serious oil supply/demand discussion where focus was on increasing demand. Due to different articles, the World Energy outlook report says that output from the North Sea, Mexico and Alaska dropped unexpected late last year and early this year. The reason is that old oil fields mature. I don’t believe that supply didn’t matched demand at that time, but we didn’t understand why the supply surplus wasn’t bigger creating a natural concern about future price increases (many oil producing countries actually keeps their declines secret).

IEA apparently talks about a production decline of 9,1% per annum from existing oil fields. The yearly decline rate can be reduced to 6,4% by optimizing the production techniques.

This sounds alarming, but the goods news are that IEA sees no supply difficulties just the investments in new oil fields are kept at USD 360 billions per year the next 20 years. Big money, but the oil industry is about big money. All readers of my comments know that investments need to include a return for investors otherwise the money will go elsewhere.      

If we accept the assumption that the global oil reserves can meet even higher demand from China and India, then it’s a matter of attracting investments in the oil industry, keeping the purchasing power for oil producing countries and understanding the public budget needs in oil producing countries.

The OPEC countries are more linked up to the oil production than non-OPEC members. For the OPEC members it’s therefore easier to link the oil price and their respective public budgets (public spending needs). Due to calculations done by PFC Energy (a Washington based industry consultant) OPEC members needs an oil price from anywhere between $10 and $100 per barrel to keep their trade balance around zero. Qatar needs $10, Iran needs $100, Venezuela is in the upper end as well, where the very important OPEC member Saudi Arabia is around $50. This might partly explain the hawkish price rhetoric from some countries, where Saudi Arabia can allow themselves to search for a compromise all the time. I would expect these numbers to refer to crude, meaning Brent/WTI is higher. Crude has a clear low at $50 with a mid price like level at $70 – 75, indicating Brent/WTI higher.

Where oil should trade to keep the international purchasing power for oil producing countries is always a good question, as not everything is traded in Dollar. If you look at WTI in EUR, the price was in a narrow EUR 50 – EUR 60 band between June 2004 and November 2007. We are now back trading just above EUR 50 per barrel. If you regard EUR 60 more fair than EUR 50 (due to inflation etc.) then it means $77 per barrel WTI (or oil trades unchanged but EUR/USD drops to 1,0500).

The last but extremely important estimate is where oil needs to trade to attract investments. IEA suggest that Saudi Arabia can increase their production, deep water production like outside Angola will increase and very important is more production from oil sand in Canada.

Current new oil field project seems to be finalized, but the global credit crunch and the relative low oil price most likely cause a halt to planned projects. This is where my concern is growing, because with the current oil price new investments are not attractive.

Mr. Christophe de Margerie, CEO of the French oil company Total, says that it’s Canadian oil sand projects need an oil price around $90 to make it interesting. Their deep water developments of the Angola coast require $70 per barrel. He also mentions that new projects will be postponed at the current oil price. He is of course not speaking for the whole industry, but due to different media reports other executives confirm this picture. The global credit crunch doesn’t seem to worry as much as the actual oil price, which makes sense.

Adding all the above together, it indicates that at $85 per barrel Brent/WTI the oil world can and will satisfy the demand. It means a price increase of 30% compared to the current price. It will have a contractive impact on growth or maybe just delay a turnaround, and it will hurt the stock market again.

If the oil price stays around the current level for a longer period, then the price will jump above $100 per barrel very fast when the world start moving again. Market participants will suddenly remember the IEA report from this month about declining production.

If we don’t get a part of the pain now, then I fear that stocks will crash again if oil jumps. Both scenarios are negative for the stock market though the $85 per barrel should be manageable. Most negative for Europe and Japan, less for USA and the least for India and many Far Eastern countries (partly due to the state subsidiary of energy).

Peter

3^rd November 2008

This week, the hot topic focus on Hedge Funds as they deleverage, but how much and how long time?

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Global equities:

Nikkei 225 (7.163) Topix (747) Dax (4.187) FTSE 100 (3.704) Dow Jones (8.378) S&P 500 (877) Nasdaq Comp (1.552)

Several of the targets were reached surprisingly fast and the European ones this Monday morning – but aren’t there any good news at all? You might not call them good, but at least indicates a development that might be tough but necessary before a change in equity markets is a reality.

Some economists point at May/June next year as the low, where the recession will fade out, also (as mentioned under EUR/USD) is an US unemployment rate above 10% now possible. It sounds bleak, but the good thing is that people starts to deal with realty and is willing to bet on the end of the downturn.

If you read this weeks Hot Topic I conclude that selling pressure from hedge funds continues, but one day real money will step in as the equity market will be too attractive. Like I wrote in last weeks Hot Topic, it will be a bet on when the recession is over. First rounds of true bets (large volumes) will come in after the corporate earning estimates for 2009 have been released but before a majority believes in an end of the recession. If this bet holds will depend on how the recession develops, if it turns in to a depression, then large selling into a black hole is the result. Otherwise the big rebound is a reality from early 2009.

As mentioned several times has Far East priced a global slowdown more in than other markets plus they have the best fundamental preconditions for a rebound. The US slowdown is steeper than in Europe, but in Europe the crisis have the longest duration.

What to watch out for this week? The US market feels like it might have found some short term support (or at least no panic), so the Monday close is important as it will lead the way for rest of the globe. The Fed rate cut Wednesday is priced in but the US Q4 GDP numbers on Thursday is a market mover. Otherwise are earning reports in focus again. I look at Kraft Foods plus Proctor & Gamble Company on Wednesday, Thursday I have ExxonMobil Corporation and Motorola Inc as the most important ending the week on Friday with the results from Burger King.

The 2009 P/E forecasts for DAX companies are based on an increase in corporate earnings of 20% in 2009.  We all know that it will be a different story. The many earning reports from Germany during this week (SAP

on Tuesday, Bayer and Lufthansa on Wednesday plus MAN on Thursday) are very important. Hopefully we will have the first new indications for 2009 so investors start to get a feeling for the right pricing. Sort of the same picture in UK, but like mentioned under FX the UK economy will underperform and so will FTSE 100.

Short term I think the most important support for Nikkei would be a FX intervention in USD/JPY. The discussed public stimulus packages should be noted and the talk of renewed public purchase of stocks is important as well.

I have the feeling that Far East is short term oversold, but it’s too early to buy despite a possible rebound. The new targets are adjusted to match the 820 in S & P 500 as I regard that index as leading. We could have a global rebound, but the new targets are where I believe we should head before considering buying stock under the current circumstances.

Targets: Nikkei 225 6.683 Topix 697 DAX 3.906 FTSE 100 3.456 Dow Jones (7730) S&P 500 (820) Nasdaq Comp (1489)

China:

Hang Seng (11016) Shanghai B (91) USD/CNY (6,8332)

The China coverage has been longer the last couple of times so I keep a bit shorter this time. Since last week Hang Seng’s meltdown is of course the most severe happening, it feels clearly oversold despite that Hang Seng is fairly different compared to other stock indices. Shanghai B lost 15,7% during the week, which is more than the domestic A market, showing that western investors are reducing in line with the global trend.

I expect Hang Seng and Shanghai B to rebound the coming days so I use Mondays close as the new target. After the rebound a new sell off is likely, but we need to evaluate the markets when we are so far.

Very interesting is how China takes an active role in the global crisis. It underlines how much the Communist Party worries about the domestic economic situation. More examples of how the Chinese middle class is getting squeezed in the housing market as prices starts to drop. Several house owners complain about the dropping prices. Lately, in the city of Hangzhou homeowners stormed the office of a developer because the company sold remaining flats at a discounted

In Hong Kong in seems that the city’s payout welfare check to the elderly people will rise with 30% to HKD 1.000 per month for people over 65 years – will China do the same?

As mentioned several times before, I think it is important to follow all these initiatives as it turns the Chinese economy to a domestic demand driven economy (the new USA).

Targets: Hang Seng 11.000 Shanghai B 90

Currency markets:

EUR/USD (1,2430): Same picture like the last weeks with capital movements as the key driver. The stop loss at 1,3450 last week was ok, but I still have difficulties to convert the bear outlook on equities into the right EUR/USD view. All eyes are still on equities which is natural, but on top we will have negative news from Central- and Eastern European countries plus bad news from the Euro Zone. It’s hard to find any support for the Euro at all, meaning the 1,30 – 1,35 range seems far away right now as negative us fundamentals is totally out of focus. Regarding US are some now predicting an unemployment topping out above 10% and Q4 GDP at minus 4% (annualised). I need to repeat that the economic downturn in US is steeper than in Europe, but other forces are working now (please also see the “Hot Topic”). Many fundamentals this week, but I watch the 50 basis point rate cut from Fed on Wednesday and the US Q3GDP on Thursday (expected -0,5%) as this weeks highlights. The expected intervention in USD/JPY below 90,00 in USD/JPY (please read below) should lead to wild swings in EUR/USD as well. Inflation is not a topic at the central bank meetings these days, so ECB will cut with 50 basis points next week.

Targets: Range 1,2050 – 1,2550.

EUR/GBP (0,8060) – GBP (1,5450): Last week they came – the official bad news from UK about everything just looks bleak. No wonder that the target at 0,8050 in EUR/GBP was reached but I missed how severe the drop in GBP/USD would be due to the Dollar move. There is no reason to believe that Sterling will be supported by anything at all. Right now I think that many sluggish news are priced in GBP, so the targets are sideways for the moment, but Sterling is the weakest of the major currencies.

Targets: EUR/GBP 0,8050 – GBP/USD 1,5500.

EUR/JPY (116,40) – USD/JPY (93,50): Bank of Japan will intervene below 90,00, is my expectation. The G7 statement I read as a support to Japan if they choose to intervene, but BOJ will be alone without other central banks joining the action. The sudden strength of Yen is too much for Japanese exporters and a FX intervention could be positive for Nikkei as well. Bank of Japan can block the market if they want, though it won’t happen but the amounts could be serious. It will impact EUR/USD as well with good swings, but the problem is that BOJ would buy the greenback as well….½ EUR/JPY and ½ USD/JPY could be the solution, but BOJ is traditional not so keen on Euro’s. I change the targets to market levels.

Targets: EUR/JPY 113,00 – USD/JPY 90,00. Both rebound 5 big figures if 90,00 in USD/JPY is reached

Central bank rates

US Federal Reserve Bank: The next cut is on Wednesday this week – 50 basis points.

Bank of England: They have an golden opportunity to follow Fed and ECB with a new cut very soon – also 50 basis points.

European Central Bank: Next cut is on Thursday next week – 50 basis points.

Bank of Japan: BOJ will stay at 0,50% rest of this year.

The answer is of course no and the industry will continue to exist, but as the French finance minister Ms. Christine Largarde very wisely explained last week, is the financial world still deleveraging.  

Hedge funds have been a key driver behind leveraged gains in different asset classes. This makes the sector a natural force in the current “deleveraging period”. In the ongoing attempt to look into the crystal bowl I choose to check out on hedge funds as these people currently are key drivers in the market.

Depending on the sources, the number of hedge funds in early 2008 was between 8.000 and 10.000. 8.000 hedge funds that are covered by Hedge Fund Research (HFR) represented around USD 2 trillion of the USD 2,05 trillion that clients had placed in the sector. It can be no surprise that clients are withdrawing money as everybody cuts risk, but ironically are clients withdrawing capital from hedge funds, who have managed the crashing markets better than many others.

It is estimated that the USD 2,05 trillion have been reduced with USD 300 billion so far this year. As the notice period for withdrawing capital is between 3 and 12 month is it realistic to expect the outflow to continue for some quarters yet. One guess in the market, is that the number of hedge funds and capital under management will be reduced with 25% i. e. USD 500 billion. It’s hard to judge what leverage the different hedge funds have, but surely the deleverage in the market will continue. Again it is difficult to say what assets will be sold as some hedge funds runs large short positions as well, but overall hedge funds will still be net sellers of assets. The short positions will cause strange sudden moves upwards. If this estimate holds, then we are more than half way through (very important). It’s huge sums, but if you look into history it just brings the industry back to the 2005 level. The risk is that investors are forced to reduce further, meaning we are not even half through in the asset reduction.

The year-to-date result for all hedge funds (HFR index) is -17,6%. A result many investors would dream about when they look at their own equity portfolios today. The results of course varies from -50% in minor sectors to a few positive results, but the very important Long/Short equity hedge funds have delivered an impressive +0,8% year-to-date result (HFRX sub index) – so why are investors fleeing?

During these serious credit crunch times it would be easy to say that hedge funds can’t find the financing, making it uninteresting for investors to be in the game. In the reports and the comments I have seen, it seems that hedge funds can continue to fund their leveraged business – i. e. not the primary reason.

Some institutional clients needs to change their risk allocation during turbulent times, this explains a part, but only some. There are 2 other good explanations.  If private investors need to free up capital, they have the strange habit of closing out liquid investments where they haven’t lost money. Everybody needs free capital these days, so they cut hedge fund investments where the capital still might be intact. Another explanation is that hedge funds have been famous for moving money around very fast – the hot money. Their investors liked them for that, but now the hedge funds suffer from this habit, as it’s not “hot” for private investors to place money at hedge funds any more (and the hot money probably went up in the air somewhere else).

My conclusion is that the hedge fund industry will continue, but investors will withdraw capital further. The question is if the industry scales back to the 2004 or the 2006 level (-50% or -25% of the capital under management as of early 2008). I think closer to 2004 than 2006, but I also think that the industry already have reduced risk for more than equal to the USD 300 billion risk capital, mentioned by some industry sources. All in all is the risk reduction probably half way through or even a bit more.

Where will the private hot money go? Most of them are gone the same way as hot air – up and away. Ms. Largarde is right, the world is deleveraging…..looks to go on for another 6 months time. In particular CHF and partly JPY will gain and hedge funds must be net sellers of stocks.   

Best regards

Peter

The US stock market is so important these days so it’s simply this weeks “Hot Topic” which you will find further below.

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies plus China.

Currency markets:

EUR/USD (1,3305): The Euro is clearly offered again and the stop loss in EUR/USD was reached again. In the currency market US fundamentals doesn’t hurt the greenback, which actually shows how bearish the market is on EUR. Sort of the same song like the past weeks about capital outflow from the Euro Zone, though not only JPY are actively bought, also Dollar. Once again the currency market follows other asset classes, but Euro feels softer than usual, particularly when we consider the more than bad US retail sales numbers last week. Despite we are in the middle of October, I am sorry to say, that it’s hard to find any fundamentals that can move the currency market this week. We will watch the US existing home sales on Friday (expected 4,93 million), but not a true market mover. Basically I still go for a higher EUR/USD again due to serious problems in USA that isn’t priced in now, but it’s against the trend to argue for levels above 1,4000. It looks like a 1,30 – 1,35 range for a period

Targets: Range 1,30 – 1,35. 

EUR/GBP (0,7770) – GBP (1,7140): EUR and GBP are under pressure, but despite the big rescue package that also should support some troubled UK home owners I still go for Sterling as the weakest of the major currencies. Of course are many bad economic news priced in the GBP price, but we have no real idea about where this ends, making GBP soft and myself keeping the EUR/GBP target. Last weeks unemployment data confirmed the worrying downtrend. As most important this week I watch the September retail sales on Thursday (expected -0,6%) – a pretty important number.

Targets: EUR/GBP 0,8050 – GBP/USD 1,7000.

EUR/JPY (135,70) – USD/JPY (101,77): As mentioned above is JPY still in demand as safe heaven, but not as outspoken as before. The greenback is currently gaining in importance even against Yen. In September I mentioned that JPY could weaken in October after the H1 ended in September. Several sentiment surveys are out this week, but they will all be depressing reading which is priced in. Interesting is the stimulus package of Yen 2trln. that was approved by the Japanese Government. Fiscal bills can hurt a currency, but not the first one but the next one could do. My target in EUR/JPY is too far away, but I still like the upside, so I lower it to 140,00 and USD/JPY I keep.

Targets: EUR/JPY 140,00 – USD/JPY 105,00

Global equities:

Nikkei 225 (9006)  Topix (927)  Dax (4835)  FTSE 100 (4283) 

As mentioned under the “Hot Topic” is the US stock market very much the trendsetting market these days. In my view, all other equity markets will follow US to a large extend, that’s why I spend the thought Dow Jones and the US fellows this time.

Regionally in Japan I think the stimulus package mentioned under USD/JPY is good news for Nikkei and Topix to support them short term.

In Germany the car producers, but in particular the contractors in the automotive industry will suffer ongoing. Maybe the pharmaceutical sector will counterpart the automotive declines this week.

In UK, oil, pharmaceuticals should be ok but miners will end the week lower again.

I partly understand the relief regarding the financial sector as some banks are saved from bankruptcy, but I wouldn’t be too optimistic……recession and unpleasant losses normally goes hand in hand.

I have adjusted the targets a touch lower…..again

Targets: Nikkei 225 7.835  Topix 806  DAX 4.206  FTSE 100 3.726 

China:

Hang Seng (15323)  Shanghai B (108)  USD/CNY (6,8340)

Many things are going on in China, but let’s take the hard core sluggish news first. The Q3 GDP numbers were  released Monday with a + 9% y/y growth against expected +9,7% and the +10,2% Q2 y/y growth rate. 9% in growth might seem very nice and is actually in line with the planed growth from the Communist Party. Clear for everybody is the drop in the growth rate that is worrisome.

I will bet a good bottle of red wine, that the Communist Party leaders was well aware about the numbers when they had their senior meeting in the weekend 11^th / 12^th October. No doubt that the pressure to find ways to increase the domestic demand are mounting. When these guys meet it’s unfortunately not as transparent as when G8 meets, so the information flow is slow and partly indirect.

Big decisions were taken, but in disagreement it seems. One initiative that can make 730 million people richer was announced without any headline in the world press. All 730 million peasant farmers in China are now allowed to sell or rent out their “land use right”. In China are peasant farmers given a 30 year “land use right” meaning they do not own the land but just the right to use the land for 30 years.

Making the rights tradable, means that the right holder suddenly owns an asset with a price tag = wealth. As soon as people can quantify wealth it will translate into growth and consumption…..

Very interesting, China last week already open the first exchange to trade “land use rights”, it was opened in Chengdu.

Other related effects out from this decision should be efficient farming leading to higher output (commodities) but also higher demand for products used in the agricultural sector.

A new person on the Chinese arena that might be interesting to keep an eye on is Vice-Premier Wang Qishan. He will head a new committee that is set up to deal with “fiscal uncertainties caused by the deteriorating global financial crisis”.

At the first glance one might think that it sounds reasonable, but Chinese banks and private households only have very limited exposure to the systemic risk like losses the global financial world have had. My concern is that the public Chinese investments (SAFE / CIC) abroad might have created so big losses that it starts to hurt (they will not reduce, but another fundamental buyer of assets / stocks is currently out of the market).

Hang Seng and Shanghai B reached the targets on the downside once more. With today’s Chinese GDP numbers it’s difficult too be extremely optimistic on mainland stocks despite a downturn is partly priced in. Given my continued bearish view on US equities the new targets are lower. I think many bad factors are priced in China stocks, and as always, that Far East will turn upwards first. Based on this thinking the new targets are not as low as for US.

One thing I follow very closely is how the global slowdown expands. Korea is a worry and the governments in Singapore and Hong Kong are alert (their comments shows big concerns). If the problems accelerate I will change the targets

Targets: Hang Seng 14.100     Shanghai B 100

I wish you a nice and successful week.

Best regards

Peter

Why do I choose a market that I cover every week as this weeks “Hot Topic”? The equity markets around the globe have during the past months dominated all other markets, and last week proofed that swings in US stocks dominate equity markets globally. It’s fair to expect that US will loose dominance in the financial world but right now it’s not the case. I decided to give the US stock market a reality check by exchanging more views with you than normal regarding this subject.

As mentioned last week, a rebound would be a good guess after such steep falls lately. Rebounds are natural, and the P/E values, they look so low. On 9^th January this year Dow traded at 15,5 ( S & P 500 at 16,0) but at Friday close P/E for Dow was at just 11,7 (S & P 500 at 11,6), so some fund managers speaks about going tactical long (another word for short term position taking).

We are all a bit afraid of not being long shares when the upturn starts, so if this feeling becomes more outspoken and widespread, then we won’t see the lows from 1½ weeks ago once more.

Two important issues in such markets has always been, to try to judge what is priced in the market and how does the reality looks like.

Reality – 2½ years ago I changed my view from bullish to bearish on USA, mainly based on a feeling of weakness in the housing market. It’s now a common view that to turn the US economy a stable housing market is needed (and preferably rising), as there will be no positive impulses externally. I agree, but how to do it? Friday we got another very grim US housing market number, and there is a huge oversupply of single homes suggesting that prices should go lower, at least if one believes in the supply and demand curve.

A major driver behind last Monday’s rise in US equities was the US government USD 250 billion injection in selected US banks. I doubt that it will happen too often, but the underlying thinking is not wrong. With a higher solvency US banks can lend money into the housing market. Smart thinking, but people rarely understand how much capital is needed to rescue banks, so I fear that the capital injections will go to write off’s. More public money will be needed, and the next round is going to be difficult.

Once there will be free capital to lend out to coming house owners I hope that the work flow has changed at some US banks, otherwise the lending process might slow. Today’s credit scoring system for private people in USA is an almost standardised process, that has replaced credit scorings within the banks. At some banks the scoring was also combined with mortgage lending through financial advisors for private households. To re-establish a proper risk management I think that the quasi outsourcing of credit scoring and even the credit application process needs to be sourced back in again. If these very important working routines partly have disappeared, it takes time to rebuild them (and it increases the cost base for banks). The oversupply of single family homes and a dysfunctional credit process within some banks will result in a sluggish housing market for long time. The consumer engine will hardly get any fuel from this source, depressing the domestic demand in US for even longer time. I would never claim that any bank anywhere do not have correct work flows, but just point out, that there most likely is a way to go before the lending system is back on track……  

The low P/E’s, yes they look low but we constantly needs to tell ourselves that they represent historical numbers and just tell us that stock prices has gone down. Reality is that we don’t know much about estimated 2009 earnings, meaning the cash flow from the shares is unknown and the risk should send stocks lower. Last week one big US producer (though in the automotive sector) gave some guidance for 2009. It pointed towards a 15 – 20% correction of the equity price to keep the current P/E ratio of 10.

A recession is partly priced in the US equity market, making some fund managers open for tactical positions. But the scale of a possible recession is not priced in. If growth is +0,2% or -0,2% it almost has the same effect but -1,0% instead of -0,2% is serious, and secondly, how will the recovery be? V-shape or L-shape…….We are used to V-shape recoveries, but the world is in deeper troubles than seen for Long.

We haven’t seen the full scale negative effects of the downturn yet, so it’s difficult to price in.

I respect if investors buy US shares now to try it out, but it’s what I call emotional buying against reality. Like I mentioned last week, you can buy if you think the financial crisis is over and it also caused the problem (which I don’t think is the case). This week you can buy if you think recession is priced in the current stock market prices.

Recession is the right risk to trade, so when you think the market has priced enough (or even better, too much) recession in the prices, it’s time to buy shares. Today, I would judge it’s when S & P 500 is trading around 820. If and when this target is reached we of course need to review the market again.

Short term this week the swings will be dominated by earning reports as we only have a very limited number of fundamental data.

Among the company reports I watch are American Express on Monday. Tuesday it’s Apple, Dupont and Yahoo, McDonald’s and Wachovia on Wednesday, on Thursday it’s Microsoft.   

Targets: Dow Jones (7730)  S&P 500 (820)  Nasdaq Comp (1489)

One observation I think it’s very important to have an opinion about, is what crisis is the driver behind the market moves as it will decide your risk considerations and decisions. I have my clear view on this and the consequences which you will find in the comments. Please go down the “Hot Topic” to read more.

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Equities

Global comment:

These comments are mainly regarding what we can expect from the markets in the future. Though I think it’s interesting to mention the significant history Dow Jones made last Friday. At the low on Friday, the drop within the week was bigger as the biggest selloff in any week during the famous year 1929. The worst weekly drop ever in 1929 was “only” 9,2%. Not that it helps us, but we are talking about moves of historical dimensions, certainly leading to rescues of historical dimensions as well, maybe also opportunities.

The downside targets in equities have been hit several times now, and after last weeks more than dramatic ongoing selling it’s tempting to go for a rebound. Of course European banks will trade higher Monday, this combined with a general relief rebound should open up for a market with some buyers again.

As mentioned in the “Hot Topic” view is it fair, if the banking rescue makes some to bet on a happy world with higher equity prices.

You know I am bear, and despite the rebound is tempting I stay in the bear camp as mentioned above. The targets are once more lower than the current level (taking into account that US stock will trade 5% higher Monday and Japanese stocks 8% up Tuesday).

USA:

Dow Jones (8451)  S&P 500 (899)  Nasdaq Comp (1650)

In US the quarterly earnings season starts again where I watch JPMorgan, Citigroup, Google, eBay and Intel. The historical numbers are interesting, but all are spotting the comments about the future. If companies would do something good, they should give as much information about the outlook as they can. Despite it looks worse, it might not be as bad as feared in the market, and could bring comfort.

US Fundamentals will bring 2 events for US stocks. Retail sales on Wednesday (expected -0,6%) and the October Philly Fed index on Thursday (expected -9,4). 

Targets: Jones 8.400  S&P 500 890  Nasdaq Comp 1.650

Japan:

Nikkei 225 (8276)  Topix (841)

The failure of a REIT in Japan (thought not to be possible), a life insurance company that went down and serious bad machine orders wasn’t all too happy news. The Japanese Government have stopped selling the banking shares they bought for 10 years ago – at least it reduces the selling pressure. The week in Japan will be dominated by the global market swings.

Targets: Nikkei 225 8.250  Topix 840 

Europe:

Dax (4544)  FTSE 100 (3932) 

Last week I mentioned the bad news for automotives in Europe where Germany has many companies represented. It’s getting clear that demand is dropping so much that some might stop their production for some weeks. Apart from the banking sector based relief rally it’s hard to see the upside for DAX, but UK is even more bleak as usual. Tuesdays ZEW index might have some attention (expected -50,0) but I find the unemployment numbers from UK on Wednesday very interesting (expected 5,6%).

Targets: DAX 4.800  FTSE 100 4.100 

Sector comment:

It’s too early to buy, but for some weeks ago I mentioned a few sectors I would look closer at. On the sector view I now add mid-sized pharmaceutical companies with positive cash-flow plus 1 or 2 patents running for another 7 – 10 years (I these companies will be bought by the large ones) 

China:

Hang Seng (14797)  Shanghai B (111)  USD/CNY (6,8345)

Two important things from China. They have stopped for all IPO’s until end of October, one could argue that it’s no good news for listed companies who needs raise capital. On the other hand, probably only a few companies would try it under the current circumstances. It shows that the government tries to support the stock market with all sort of initiatives.

More worrisome was the long awaited September car sales confirming a second month with a lower sales number. The y/y drop was 1,44% pointing at a growth of 9,7% this year, down from 24,1% in 2007.

In my view it underlines the pressure on the wealth feeling in the middle class income group.

No doubt that the Communist Party is under growing pressure to kick start the domestic economy. Difficult to point at a quick solution, but sending checks out to cash like in US would be an easy solution.

The domestic Shanghai A index actually dropped today, testing the very important 2000 level but rebounded in line with the global market. Same picture for the Shanghai B index, wit a test of 106 today. Below the 115 target, but it feels like we could be close to an interesting opportunity. Given the overall market I set the new target at 105, but I think China starts to be interesting to look very close.

Wild life with Hang Seng, where it rebounded above the target on the downside – it indicates some strength. I keep the target for Hang Seng.

Targets: Hang Seng 15.950     Shanghai B 105

Foreign Exchange

EUR/USD (1,3625)

EUR/USD is higher than last week, but in reality I struggle with my EUR view as the Euro gets hammered every time I am right on the stock market (can’t win them all). Like during the last weeks, the equity markets are everything, so I spend more comment space on that asset class. Friday evening EUR/USD was squeezed down to 1,3275. It might be the Lehman CDS auction / settlement where none of us have an idea about the total volume (but it’s very big) as each bank only know their own numbers. I keep the 1,4250 target with a stop loss again as I think the market movements let us forget how big the problems are in US. I think it will come back in the limelight again. Like for stocks is the fundamental key data this week the retail sales on Wednesday (expected -0,6%).

Targets:  1,4250 with stop loss at 1,3425.

EUR/JPY (137,20) – USD/JPY (100,40)

JPY continues to profit from the ongoing fire sale in shares and the safe heaven status, but fundamental reality for Japan’s economy has become much more problematic lately. Mid term it should give an upside reaction in EUR/JPY, but other forces are currently ruling. The news last week (please see equity comments) are no good so I keep the targets despite they are against the trend

Targets: EUR/JPY 146,50 – USD/JPY 105,00

EUR/GBP (0,7860) – GBP (1,7360)

EUR/GBP went up through the target but is now trading lower again. Fundamentals are less important, but the serious mid term outlook  for UK makes me raise the EUR/GBP target to 0,8050 and leave the GBP/USD target as it is. The unemployment on Wednesday I watch extremely close (expected 5,6%) as very important this week.

Targets: EUR/GBP 0,8150 – GBP/USD 1,7900

Central bank rates

US Federal Reserve Bank: We got the 50 basis points cut, though in a surprise way. Another 50 basis points are in the cards, but most likely split in 2 times 25 basis points. One more time in October and one in November.

Bank of England: I think they will wait and see what happens after the banking rescues before they decide. Rate cuts is a classical help to the profitability at banks, and now that the government has such a big stake in banks it would suit their own position……...

European Central Bank: I thought that it would be 25 basis points in November but the developments forced ECB to something else. ECB for sure want to see what happens before another move.

Bank of Japan: BOJ will stay unchanged at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

This week I start with the “Hot Topic” again, as depending on what you regard as the primary driver behind the crisis it will determine how your mid term risk assessment should be.

Many media reports and politicians speak about the financial crisis as being the reason for a slowdown in global growth. No doubt that a crisis among financial institutions has a negative impact on economies in general. But I argue that the financial crisis is caused by a global slowdown that started in USA for more than 2½ years ago, and by a busting global real estate bubble.

For 2 ½ years ago some smelled that the US housing market was turning sour, and as we all were full aware of at that time, it meant that the US consumers’ cash machine was turned off. Since then the demand slowdown has spread across the globe. Many seem to have forgotten how private consumption very suddenly dropped in UK and Japan last year. What we observe now is a global move towards recession, and a recession always takes casualties among banks.

The serious issue in this downturn, is the leveraged economic world we lived in. The decade of much too cheap money from Fed and Bank of Japan made it too easy to invest with less and less own equity. In both US and Europe houses and real estate projects was sold with a debt ratio above 100% and many other investments was done with minimal equity. When demand in the world stops, then assets corrects lower, but this time we had stretched demand driven growth to extremes, partly due to cheap funding.

The forceful global asset price collapse worries all of us, but we come from extreme situations. A couple of times I have given examples on how leveraged the European banks had become (more than most US banks). In US, even during autumn last year Dow Jones continued to climb and making new highs above 14.000. This, despite it was clear for (almost) everybody that the US economy was pointing downwards. If Dow Jones had topped out around 12.000 at year start 2007 it would had make sense, and given a possibility for a correction down to 10.000. It would also have been unpleasant, but easier to survive, and maybe without coming into a bear market territory.

In my world fundamentals (dropping demand followed by slower growth) took over and caused assets to be less worth. The powerful pace of prices on assets falling almost every day is caused by the much too high leverage. In my view the bearish fundamentals factors are still working and spreading, i.e. the original economic slowdown is now to become a recession – globally.

A few official institutions have been very realistic about the upcoming problems. IMF is particular in the lead, though Bundesbank and Bank of England have been ok as well, where Fed is good in taking action. If you choose to listen to IMF, then they are forecasting more negative news to come. I agree and do not expect any recovery just around the corner. Despite this bear view, there might still be interesting opportunities out there, but more about that in the comments below.

The speed in the global slowdown is accelerated by so many banks in more than serious problems. I agree 100% in what is done from the different governments, as these solutions are the necessary steps to save the financial system. We are talking about making sure, that basics within the banking sector function and surely not re-establishing the banking system we had for just 1 year ago. More losses are not to avoid for the banks as the Ice Age is coming right against us.

If you are more upbeat on the world than I am, and in particular, if you believe that the global crisis is caused by the crisis in the financial sector, then it’s time to buy assets now. The global banking rescue of historical dimensions will stabilise the sector, so with this rescue a very negative factor for the markets is gone. It’s not my opinion that it will save growth in the world, but I surely respect the view.

I need to mention it. One of the features in the different government bailout plans, is….guess what, yes I know you have seen it, but very ironic, even lower rates and more liquidity – the key element in the “Big Experiment” that send asset prices towards the moon, and now causes a global meltdown.

I early July some predicted that the markets would go up, but the trend is clear – down. Will it ever end? Yes, one day, but not yet. It’s difficult times, but the worst is that it is pretty late many realizes how bad the situation is, meaning there are still some stops to be taken out.

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Hot Topic – what’s going on and where will it all end ?

The Hot Topic was thought to cover a single issue that is in focus, but this week I try to highlight the

developments that I suggest are important to include in the risk considerations. As everybody try just to get the

overall picture, this is meant as the long term view I have right now. The detailed market comments I have made

shorter this week (makes little sense to discuss, normal interesting data, that moves the market 1 – 2% when the

world moves 5 -10% within 24 hours).

No doubt that investors escape almost everything and are rushing into very few safe heavens like US T-Bills, but

also back to Japan as mentioned the past weeks.

In equities the trading pattern indicates that professionals unload stocks at any uptrend and the down trend

accelerates due to stop loss selling (like short Yen / long stock positions). If this anticipation is correct, then it

underlines the growing uncertainty about future income among corporate companies. The consequence is

further repricing of assets (a nicer way to say that more losses are expected in the global stock markets).

Each country worldwide gives immediate aid to their domestic financial systems, though in different ways. The

banking bailouts have become well known, but important investors like the governments in China and some

Middle East oil producers now intervene directly in the domestic stock markets. Particularly the Middle East

governments was until recently steady buyers of US stocks but this source is gone for the moment, partly

caused by the domestic support.

The European banking crisis grows so fast, that it has overtaken the US financial crisis in terms of market focus.

The problems in US are still growing, but the developments in Europe show how steep the negative

development is. Saturday’s coffee get together in Paris between France, Germany, Italy and UK, as expected,

didn’t bring anything, but at least, all European nations probably establish their own guarantee programmes for

the banking sector.

Fine, because it avoids the risk of panic among private clients that could lead to extensive run on banks. Very

unfortunate it doesn’t fix the fundamental problems for the European banking sector, high leverage, growing

losses and lower earnings. It might be a surprise to many that European banks are much more leveraged than

US banks. It has been well known, that the increase in profitability among European banks during the past

decade solely came from more leveraged balance sheets. In US, the banks outside Wall Street, have lent 96

cents for each USD 1 of deposits where continental European banks have lent 1,40 EUR per EUR 1 of deposits.

One could argue, that the credit quality is better in Europe due to higher saving ratios among European private

households, but it’s a difficult call in these markets.

As the global downturn is spreading forceful we must expect higher write off’s in Europe on top of the hits from

the US sup prime loans. This, combined with a pressure to lower the leverage, naturally results in much lower

earnings in the European banking sector. Which again causes further delays in restoring a healthy capital base.

With a global growth slump combined with a battered banking sector in US and Europe, an economic Ice Age is

inevitable – the golden questions are how long time it will take, what measures will governments take to prevent

a prolonged economic crisis and when will investors start to believe in the end of the Ice Age ?

The Ice Age will be very visible next year, where I am worried about some of the refinancing needs within the

banking sector and among stressed corporations. When we are through this bulk of refinancing, we have an idea

about the financing costs for a period. During the same period sales and corporate earnings will adjust lower, but

as a result we get a better feeling for the new P/E values and the related stock prices.

The governments who still have fiscal policy ammunition left over will use it, so good old Keynes is back on

stage. A new round of checks from the US government is not unlikely (despite it will remind about the Bush

administration), in Europe more public spending in some countries is to expect (the constrain is the high level of

public spending we have already), China is clearly doing a lot to move the domestic demand and Japan most

likely joins the public spending spree.

We are still on the way down but when investors get a feeling for where the new corporate earnings will be, the

liquidity squeeze is manageable and public spending starts to work, then some risk appetite will return to the

market.

An additional asset class that needs to stabilise before the world recovers is where all the troubles started – real

estate. Even in USA where the downturn in housing prices has been going for long, the data last week showed

that it was another month with new lows. When the real estate market will stabilise is too early to judge, as it just

points lower. Particular in some areas in Europe, but Japan is getting deeper in minus and in China is a negative

price development a risk.

The good news in this depressing repricing world are the lower commodity prices. Combined with the expected

public spending initiatives, this will build the base for the recovery. When investors can see the signs helping,

then we have had the lows in equities.

As always, it’s not time to buy yet, but so far I keep the view that there is a chance for lows before end of Q1

2009. I also keep the view that Far East has the best preconditions for the recovery. When USA and Europe will

recover is still unclear for me, USA is still on the steep way down.

So much on my fundamental long term view. Below are few thoughts for the coming days.

Equities

USA:

Dow Jones (10325)  S&P 500 (1099)  Nasdaq Comp (1947)

Even the10.400 target in Dow Jones – at least nice that I have some luck in equities when I misjudge the currency marketso much.

What is to be said about equities in addition to the Hot Topic view? Some interesting information bits and pieces

are always to be found. Pretty important are the many US corporate results that start to be released in October,

as we all will study the earnings reports closely.

The steep Friday evening New York sell off with 5% within 2 hours is worrisome and points towards lower levels.

Targets: Jones 9.800  S&P 500 1.045  Nasdaq Comp 1.850

Japan:

Nikkei 225 (10473)  Topix (999)

So the Japanese Topix closed below 1000, who would have believed that?

I can’t find anything upbeat about  Japan – apologise.

Targets: Nikkei 225 9.950  Topix 9.500 

Europe:

Dax (5500)  FTSE 100 (4745) 

Some might also have noticed the very sluggish views from the European car producers last Thursday and

Friday. No relief there and it will hurt the automotive sector, where many German companies are exposed. It

should give negative readings in the German industrial production, and most likely the automotive sector will

underperform the next 6 – 9 months.

I can’t find anything upbeat about UK either.

All targets have been reached, and the new target will be lower, but with stocks swinging 5% a day it feels wrong

just to forecast another 5% down. The message is that I see shares trading lower and then we need to take from

week to week.

Targets: DAX 5.225  FTSE 100 4.500 

China:

Hang Seng (16800)  Shanghai B (126)  USD/CNY (6,8425)

With China on holiday most of last week it was very interesting how the Chinese mainland stock market reacted

this Monday morning. The drop was “only” 5% which is pretty ok when you take last weeks happenings into

account.

It actually seems that China had a national holiday as not many new signs and discussions came from China,

despite the challenging times. No doubt that the global slowdown will have a negative impact on China, so worth

to follow are news about how to increase domestic demand and the price development in the housing market.

Earlier today I noticed that a leading bank lowered their GDP forecast for China, down to 9,6% this year and

8,0% next year. It might still seem high, but the official target is 8,5% so I am sure that the Communist Party

feels themselves forced into action regarding the domestic demand.

Hang Seng once more hit the target. I set a new target 5% below today*s close like the other markets following

the view that we are set to follow the trend down

Targets: Hang Seng 15.950     Shanghai B 115

Foreign Exchange

EUR/USD (1,3575)

Last Monday EUR/USD was 4½ big figure lower than the prior week and today EUR/USD is

7 big figures lower than last week……The two big capital flows mentioned above (T-Bill purchase and EUR/JPY

selling) is so extreme bearish for EUR/USD. The “sell on rally” view last week was wrong in the sense that it

should just have been an outright sell recommendation.

Fridays US unemployment data for the first time showed true recession numbers with non farm payrolls at -149k

(levels around -150k per month are typical for recessions). The unemployment rate also went up from 6,055% to

6,125%, but rounded it’s 6,1% both months – the trend is up.

As lately, the greenback only reacts on capital flows and not on economic fundamentals, but to ignore the

fundamentals means a rebound later. I know that investors are selling Euro based on all the bad news, but the

move in EUR/USD seems overdone. I change my target to 1,4250, as a recovery from the current level.

There is a real lack of economic data this week, so capital flows, news from the financial sector and impulses

from equities will be important for EUR/USD this week

Targets:  1,4250 with stop loss at 1,3425.

EUR/JPY (140,40) – USD/JPY (103,40)

EUR/JPY is 12 big figures lower than last week, so it shows everything.

As mentioned several times is Japan suddenly safe heaven. I had expected some outflow of Japan in early

October, but it seems that flight back home to Japanese accounts still dominates. On Thursday Japan releases

the normally very important machine orders (expected -2,7% m/m) which I keep an eye on.

I need to lower the EUR/JPY target, though higher than the current rate.

Targets: EUR/JPY 146,50 – USD/JPY 105,00

EUR/GBP (0,7735) – GBP (1,7575)

Serious capital moves from UK towards US and the greenback. With the

pressure on Euro I am deeply wrong in EUR/GBP as well. I lower the EUR/GBP target, but still higher from here

and adjust the GBP/USD target lower as well.

Targets: EUR/GBP 0,8150 – GBP/USD 1,7900

Central bank rates

US Federal Reserve Bank: The next step has changed from being a hike to a cut. Not that I think it is the right thing to do, but Fed needs to send all the relief signals they can. You could also say that during a crisis assures the central bank normally a loose monetary policy. Fed is already doing that, but to avoid criticism they most likely cut with 50 basis points in October.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: Mr. Trichet is hinting a rate cut now, so it looks like November with 25 basis points.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view on the consequences for the stock markets, currencies, inflation and what to expect from the central banks.

Equities

Global comment

Even the “hopers” starts to admit that the world isn’t as good as one would wish, and many professionals now shout lower! The best buy indication is usually when my mother-in-law and the taxi driver tells me that stocks just goes lower. So, why didn’t my mother-in-law say that equities will drop when we had the Sunday roast yesterday? Most likely because the bear market has just started to accelerate and the panic so far is “limited” to the financial sector.

I have mentioned it many times, but we are still repricing assets globally, we don’t know the future value of the assets nor the cash flows produced by the assets. Repricing happens like every 7^th year in the equity market, it’s nasty, takes around 12 month and then we move on forwards again. It’s not the case this time, partly because it origin from the assets belonging to private households (like in US). The broad based private household asset repricing takes much longer time for several reasons. The current bear market has a longer duration which correlate well with the missing comments on the stock market from my mother-in-law. We are simply not there yet – where the panic rules and falling shares are on everybody’s mind.

What makes me very worried and gives a strong reason to stay with the bleak outlook, is how the world will look after the financial sector crisis is over. We have no idea about how many banks yet have to fail. Only a few understands how difficult the world will be in the period after the banking flush out. It’s not about if the payment systems works, but the credit market could be very tight due to very limited balance sheet resources within the financial sector. It will be a constrain for private individuals and for many commercial businesses. Managers for some of the large corporations starts to understand how the financial sector disaster will limit private consumption.

When this spread around and get the common opinion, then we should have the panic situation, where my mother-in-law tells me that equities is a sell. When will it come, is difficult to say, but I still argue before end of Q1 next year. As some have observed, do I believe in Far East, partly because of the many private households with savings and no debt. I apologise for being so bearish as it’s always more fun to write about markets that goes up, but in general it’s too early to try being long stocks.

USA:

Dow Jones (11143)  S&P 500 (1213)  Nasdaq Comp (2183)

I am, as always, impressed by the US equity markets as they are almost unchanged compared to last Tuesday (though good swings in between). It shows something about the inflow of new money to buy stocks, or something a less leveraged market.

The US unemployment figures on Friday is the most important set of economic data for US equities this week. Surely is all attention on the TARP bailout package, but when that one is digested investors will look around for other impulses like the unemployment data.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (11744)  Topix (1128)

Japan profits from the domestic investors feeling more confident with Japan compared to US and Europe, but it will only be a relative outperformance (i.e. Japan will not drop as much as other markets. In case of positive markets, Japan is rising more). In case of positive data from other Far Eastern countries Japan will gain the most from these news, compared to US and Europe. Interesting data for the week are mentioned under the Yen comment above in FX

Targets: Nikkei 225 11.300  Topix 1.100 

Europe:

Dax (5904)  FTSE 100 (4976) 

No doubt that the downturn is spreading in Europe. The target in FTSE 100 should be reached within hours. One thing is the troubled UK financial institutions but so far there is no relief in sight for private households. In Germany there is not the same pressure on the private household sector, but private consumption haven’t brought German economy any boost the last years so it won’t drop like a stone either. The corporate sector in Germany will depress as a function of the developments in global demand. This week, I think the overseas markets and the financial sector is the most important for Dax. The German Sep PMI index on Friday might give some swings (expected 49,3).

Targets: DAX 5.650  FTSE 100 4.825 

China:

Hang Seng (17880)  Shanghai B (131)  USD/CNY (6,8420)

China remains particularly interesting. As I had the extended comments on China last week I keep it slightly shorter this time. Last weeks comments still makes the basis for my view.

Worth to watch is the stable development in the Chinese equity market within the last week. The underlying tone has been positive to bid despite the turmoil in the global markets. This Monday morning was pretty interesting as Hang Seng dropped more than 4% but the domestic mainland A shares was around flat and B shares ended up 1,5%. The domestic A shares could absorb the negative effect from the Ping An loss due to the Fortis stake. The B shares closed higher that only can be result of net foreign buying.

The official intervention so far helped the market, but in this global environment I still find it too early to buy Chinese stocks. Due to the lack of signs of growing domestic demand I also find it premature to buy. On Wednesday the Sep Chinese manufacturing PMI will be published (48,4 last month), that surely is an interesting number. Hang Seng went below the 18.000 target. The new target is on the downside as well at 17.000, but only 4% away from the current level. The reason for the close target is, that a flat or maybe even a slight turnaround is possible (still too early to go long).

Targets: Hang Seng 18000     Shanghai B 115

Foreign Exchange

EUR/USD (1,4310)

4½ big figure lower than last week, with 2½ big figure done this Monday morning. No doubt that the market still is dominated by “sell on rallies”.

Almost all movements in any market origin in development within the global financial sector. The greenback gained after the TARP bail out plan was agreed over the weekend, but Euro is the big mover. As mentioned a couple of times are Japanese investors unloading EUR/JPY longs, sending EUR/USD lower as well.

The bad news from the European financial sector during the weekend simply increases the nervousness among Far East investors which is bearish for EUR. As I wrote in the short comment last Friday are the US economic news pointing steep downwards. Fundamentals are still not in focus, but it would be wrong to ignore them. I watch US economic data this week very closely as I think they will move the Dollar later this week or early next week.

The Aug private consumption today (expected +0,2%) and the Sep ISM Manufacturing index on Wednesday (expected 50,0) I regard as important, but the unemployment data on Friday will be a true highlight (expected     -95k / 6,1%). The coming Friday’s data will bring fundamentals more back in focus is my believe. Based on the current movements I need to adjust the current range to 1,4250 – 1,4750, staying with the “sell in the upper end of the range” view like the past weeks. I keep the opinion about a spike to above 1,5000 a bit further out

Targets: The current range in EUR/USD is 1,4250 – 1,4750 followed by target 1,5300.

EUR/JPY (152,30) – USD/JPY (106,20)

This early Monday morning EUR/JPY was almost trading at last weeks 155,75 level. As mentioned under EUR/USD, the big flows are in EUR/JPY, where Yen is gaining momentum as safe heaven among Japanese investors. Very interesting development which also confirm that short term interest rates do not affect currencies (i. e. at the moment can interest rate hikes not support currencies if they should come under pressure).

Due to the historical large problems among US and European financial institutions, are the relative more healthy Japanese banks looking safe compared to rest of the world. It should support the raising safe heaven feeling. Fundamentally are the news out of Japan not particularly good, but also concerning JPY are economic data not in focus.

Like in US, this week actually offers very interesting data. The coming night I watch the Aug household spending (expected -1,3%) and all eyes should be on the Tankan report on Wednesday.

The EUR/JPY rally stopped around 156,00 last week, but I see a fair chance for a rebound in EUR/JPY when we enter October (end of the Japanese H1 financial year in September). I keep the direction in EUR/JPY, but lower the target to 156,50 as 159,50 is too far away due to the current market conditions.

Targets: EUR/JPY 156,50 – USD/JPY 106,00

EUR/GBP (0,7935) – GBP (1,8050)

Also 5 big figures down in GBP/USD meaning the very close target at 1,8350 was more than reached. A large part of the move was more Dollar related, but I only see problems for UK. We won’t have much fundamental data this week to give new trading directions so the capital flows will dominate once more. I keep the target in EUR/GBP, but set the new GBP/USD target to 1,7900, which is close to sideways trading.

Targets: EUR/GBP 0,8150 – GBP/USD 1,7900

Central bank rates

US Federal Reserve Bank: The next step has changed from being a hike to a cut. Not that I think it is the right thing to do, but Fed needs to send all the relief signals they can. You could also say that during a crisis assures the central bank normally a loose monetary policy. Fed is already doing that, but to avoid criticism they most likely cut with 50 basis points in October.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: These people are tough on inflation. If the Euro Zone headline inflation exceeds 4,3% I go for another hike. Some ECB people tries to signal a more soft standing, I am not convinced.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

The last 48 hours we have had so many news and developments in the financial markets that I thought it would good to exchange views.

Market participants with intraday like positions have learned that all good news about the TARP bailout plan is a signal to buy stocks (in particular) and USD (to some extend). Whereas delay or negative news is the signal to sell what we just bought. TARP attract so much attention that all other news are ignored, which should worry as Thursdays data was seriously bearish.

The Japanese Aug trade balance yesterday morning showed the first Japanese trade deficit since 1982, which is fairly important to notice. But with all eyes on US the details are even more important, as the export to US dropped for the 12th straight month (-21,8% y/y – largest decline since 1980). In particular autoparts and large cars slowed significant, which is no surprise but it confirms the ongoing downtrend in US. By the way climbed the export to other Asian countries with 6,7% – the 78th straight month of increase (China is now the biggest importer of goods from Japan ahead of US).

Thursdays US data was depressing. The jobless claims was very high (though 50k caused by hurricane effects, but still too high), durable goods negative (though always a volatile number) and as the bear number of the day, a new home sales number so low that nobody guessed that one.

I respect that all market participants watch the TARP negotiations, and the market is king, but we should not get too focused on this one issue so we forget fundamentals and the underlying trend.

Market impact:

US equities will continue the repricing trend (i.e. lower) when the TARP honeymoon is over. In EUR/USD I regard the 1,4900 area (with a possible spike above 1,5000) as the current top. To establish a new USD bear trend towards 1,6000 would require evidence of a prolonged US economic ice age after the banking clean up. It will take another 3 month of data before this could happen. Another important market trend that creates selling pressure in EUR/USD is the unwinding of EUR/JPY longs from Japanese investors. So I believe in a decoupling between US equities and the greenback. Macro and micro news will pressure US equities (and the same picture in Europe) but the FX market will try to shorten EUR/USD somewhere below 1,5000.

Friday, I noticed that Chinese equities reversed a negative day to end in plus (mainly B indices i. e. foreign buyers). It still feels too early, but when you go for a rebound in an equity market, then place your bet where the peking roasted duck origins from.

I wish you all a great weekend.

Best regards

Peter

I can only say that it’s more than interesting to work in the financial markets. During the last 20 years I have only seen a few similar situations to what we explore now. Before I started in the market we had the first Far East crisis, then the ERM that broke together and the wild FX market after that, then the second Far East crisis. But these crises were mainly new pricing of financial assets. These are often painful but short lived. 2 other situations are very important to learn from – the Japanese real estate melt down in the early 1990’s and the same in the Nordic area around the same period. The lessons to learn from these 2 occasions are very unfortunately that they are painful but long lived – i.e. what we are going through now. It’s now we need to remember that the doesn’t go down, one day it will point up. It’s still too early to buy any asset, but the good old bear here starts to watch out for opportunities (China).

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view on the consequences for the stock markets, currencies, inflation and what to expect from the central banks.

Before my holiday I was travelling where I unfortunately had some technical problems, meaning I couldn’t enter the weekly comments. I apologise for that. The last 2½ weeks I had my summer holidays, but not totally away from the market – it was too exciting.

Instead of a “hot topic” I have spend some more time on China this time, so it’s a separate entry below this weeks comments.

Equities

Global comment

Hmmmm, what to say? Of course it wasn’t too wrong to be bear and I stay with the bear view so far. But the swings are so wild that it is difficult to consider the new levels as the market reverses within 24 hours. Before my holiday the market was spilt in hopers looking for investment opportunities and the bear camp. Now people are scared more than anything else and in exactly such times one normally should buy stocks. This time is different, as unnatural events push equities up. When short selling of some financial stocks is banned, the shorts are bought back and the equity prices goes up, but it’s not a signal to go long this time. The lows in financial stocks last week and around 17th July might now be interesting entry levels if they come again, but it’s another story. The global happiness about the US taxpayers USD 700 billion bail out is justified but only because it saved the world from a global melt down in the financial industry. Hangovers will come and most likely some nasty ones, as banks will need to make immediate write downs if they sell assets to the new “Bad Bank”. It is a part of the clean up and over time it will restore confidence, but the rebound is too early.

USA:

Dow Jones (11015)  S&P 500 (1207)  Nasdaq Comp (2179)

Like in the last months the banking sector overshadow rest of the stock market where fundamentals and other company news are forgotten. US is weak with the unemployment at 6,1% and rising, industrial production fell by 1,1% last month and retail sales is the weakest since 7 years. A very bad cocktail for any equity market and we havn’t seen any earning forecast for 2009 from US companies yet. When the earning estimates are released (and then subtract 10%), we could get an idea about the right pricing of stocks. During my holiday the target for S & P 500 was almost reached at 1.140 and the low in Dow Jones was around 10.600 but I leave the targets as they are.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (12090)  Topix (1168)

The targets in Nikkei and Topix was more than reached and given the global sentiment I set new lower targets, but not that far away from the current levels due to my believe in Far East. The conclusion is, that the market is still repricing but we are getting closer to targets where some equities might be interesting.

Targets: Nikkei 225 11.300  Topix 1.100 

Europe:

Dax (6070)  FTSE 100 (5190) 

The rebound in FTSE was even more extreme where the 4.825 target nearly was hit as well, but I keep it as the UK economy is on the way down where in particular domestic oriented companies must be hurt more. The Q3 German GDP growth will be negative, though not official yet, but it was hinted by a senior government member. German exporters are good in doing business, but I think that the negative European environment is too heavy for DAX so the target at 5.760 still seems realistic. The Euro PMI indices Tuesday and IFO Wednesday should normally be an impulse for DAX but the US stock market is still dominating.

Targets: DAX 5.650  FTSE 100 4.825 

China:

Special edition below.

Foreign Exchange

EUR/USD (1,4795)

When I sent out the latest weekly before my holiday, EUR/USD was trading at 1,4795 and now we are back again…..Yes, I did follow it all the way down below 1,4000  What I clearly misjudged was the magnitude of the unwinding of long EUR/JPY positions primarily from Far East. Before my holiday the market thought that US was on the way out of the woods and Europe would be the next to go down. Now everybody argue that US will come into trouble because of the USD 700 billion bail out. Overshooting both ways – US is in trouble and I keep the view that in US we still have the steepest downturn resulting in the pressure on the greenback. The Euro Zone is heading towards problems but due to the nature of the economy, the slowdown is not as steep, but with longer duration (some of the reasons are a less flexible labour market, higher social transfers and that a bigger part of private households has less debt than in US). The wild moves we observe is also caused by market makers cutting their risk appetite, but where market users still are crowding in and out at the same time in the same direction. The Lehman chapter 11 filing means that banks are forced to close down positions with Lehman that partly end up in EUR/USD positions. These positions just get executed regardless of the market conditions. In what direction is impossible to say, but I expect a major part was executed last week. Fundamentals are hardly in focus at all but I watch US existing home sales on Wednesday (expected 4,95 mio) and US new home sales on Thursday (expected 515k), and of course Fed’s Mr. Bernanke Wednesday afternoon – he should have enough to speak about…..EUR/USD is back in the 1,4550 – 1,5050 range but I lower it to 1,4450 – 1,4950. I still go for a spike above 1,5000 when the uncertainty towards the US presidential election rise, but the target is 1,5300 now.

Targets: The current range in EUR/USD is 1,4450 – 1,4950 followed by target 1,5300.

EUR/JPY (155,75) – USD/JPY (105,50)

As mentioned under EUR/USD, I really underestimated the capital move back to Japan. It is very interesting to see that Japan is gaining a safe heaven status, but I think it’s mainly among the Japanese investors (plus some carry trade unwinding). Looking for the next upswing some of you might have noticed my preference for Far East (China piece). The new upturn will not origin in Japan but the country will surely participate in the rebound, though with the biggest effect for equities and not Yen as such. Getting closer to the Japanese ½ year might support Yen, but in October I am more bearish regarding JPY. Fundamentally are the CPI numbers on Friday the most important this week (expected +2,1% nationwide). I have set new targets, but no wild ones.    

Targets: EUR/JPY 159,50 – USD/JPY 106,00

EUR/GBP (0,7850) – GBP (1,8550)

When I had a glass of red wine in my holiday, EUR/GBP hit the 0,8150 target and now the market is back to pre holiday levels. The big attention on US took UK and Sterling out of the limelight. I still see the same problems for UK which should send GBP lower, but the focus is elsewhere and with a week without fundamental news, GBP will trade sidelined. The EUR/GBP target remain 0,8150.

Targets: EUR/GBP 0,8150 – GBP/USD 1,8350

Central bank rates

US Federal Reserve Bank: The next step is a hike from the current 2,00%. The million Dollar question is about the timing, where I would have said mid to late November if it wasn’t for the US presidential election. Early December seems more realistic.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: These people are tough on inflation. If the Euro Zone headline inflation exceeds 4,3% I go for another hike.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

If you would like to recommend it on Digg.com it’s ok for me Icon below

China:

Hang Seng (18972)  Shanghai B (129)  USD/CNY (6,8320)

China is more than interesting – will the stock market mega rebound or go into a black hole ? Automobile sales is worth to watch in any country as it tells more about the health of the state than any speach from an official. The August carsales shrank 6,3% y/y to 629.000 vehicles so the September number to be released in the near future will be watched very closely. China is actually the second largest carmarket in the world but the expected sale of 10 million units this year will be missed. It’s another indication that the Chinese middle class is under pressure, and with good reason.

Private individuals can save in 3 different ways in China, deposit money in the bank at a very low rate, buy A shares or buy their own property. The deposit solution would have been the best but not very sexy and surely not for Chinese private investors. The way to generate wealth during the last years have been thorugh the booming equity market (you could buy blindly). With the 70% drop since October last year that wealth generator disappeared for the middle class.

They are not stupid in the Communist Party so the intervention in the domestic Chinese stock market last week serves several goals. Partly to stabilise the banks from sliding further down, but surely also to comfort equity investors and get some wealth feeling back. Another concern is the Chinese real estate market as too many reports about refinancing problems for property developers circulates – partly as a natural consequence of declining real estate prices and volume. The worst effect is the depressed wealth feeling among private households and less the negative effects on the banking sector.

The financial institutions will explore bigger losses, but probably will only a few come into troubles on that account. The nonperforming loan ratio of private mortgages went up from 2,37% by end 2007 to 2,56% in June this year. Not so worrisome as the real estate-related lending has an average of 24,08% among the 14 listed banks (1 bank is above 40%) and the average down payment when individuals buy homes is 37,2%. To ease frictions in the Chinese economy a more flexible financial system is needed and that might be clear for the Chinese leaders as well. A few days ago a conference was held in Beijing, where Wu Xiaoling, vice-chairwoman of the Financial and Economic Committee of the National People’s Congress spoke and argued to “lift excessive regulatory restrictions”. I take it as a sign that much will be done to bring growth and the wealth feeling back to private households.
What should the investor do now ? Believe that official China will win the battle and send equities higher or will the dropping housing market kill the last wealth feeling and the banks ? I have mentioned several times that the rebound in stocks will come in Far East where China naturally has a part in that game. I thought that China would intervene (or similar support actions) at a higher level around 150/155 in Shanghai B, which was the reason for the rebound target to 185, but now we rebound from the 105/110 level to 130. A new drop to 115 starts to look attractive, but it’s not a buy recommendation yet. As mentioned in a couple of mails earlier, is PPI rising faster than CPI which is a problem for corporate profits and partly caused by state controlled price limits.

But all in all we have a Chinese government that intervenes in the equity market, is ready to accept higher inflation (helps corporate profits short term) and to deregulate the financial market. I would look for stocks within some retail sectors, maybe 1 or 2 banks, production of special equipments, some utility, drugs, agricultural sector as a start. The time to execute is during Q4.
The target at 19.500 in Hang Seng was more than reached as the low was 17.650, but in a wild session and we are now trading around the target at 19.500. Right now I continue to be bearish on equities as you have noticed, so 18.000 in Hang Seng and 115 in Shanghai B are the next targets.

Targets: Hang Seng (18000)  Shanghai B (115)

Very unfortunately I have a technical problem to get the comment fully posted on the blog. I am travelling for a few days, it apparently causes a few IT problems. The comments will be published Thursday.

Commodities are correcting further, but everybody have realised that global demand is dropping like a stone so wherever you look, the downturn is evident. Some hopers say lower commodity prices helps corporate profits, might be says the bear, but PPI is up in the roof, and that surely diminish corporate profits. Should we worry about the geo political tensions between Russia and the Western countries ? Bad timing for the markets, but it’s not a real concern yet.

It’s not all only bleak and just for the bears as you can read below, but the timing is difficult. Explore and study the market so you are ready, but hold the cash on your account for a while yet.

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view on the consequences for the stock markets, currencies, inflation and what to expect from the central banks.

Equities

Short general comment :

When talking about equities we always search for good buying opportunities (unless you runs a hedge fund looking for shorts). But if you honestly ask me about where to find something to buy, my answer is “look away”. If you spend the few minutes to read the FX part, it’s clear that the macro economic environment is negative for equities. In addition has the rally sentiment during the last 3 – 4 weeks faded out.

USA:

Dow Jones (11479)  S&P 500 (1278)  Nasdaq Comp (2417)

In US I expect a renewed test of the crucial 1255 in S & P 500 very soon, so far the market didn’t stay in the bear zone very long, but I still go for period in the bear territory. A few Q2 reports are in the pipeline and I admit that negative surprises are priced in. But as mentioned several times before, the US banking sector gives volatility in Dow Jones / S & P so it’s more difficult to follow the underlying trend in the stock market. That underlying tone is soft for US shares and now banks are pointing down again – looks bearish. I think the financial sector news and Philly Fed on Thursday is the most important for US stocks this week.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (12865)  Topix (1235)

Nikkei and Topix react heavily on sluggish US news, but I keep an eye on the possible Japanese stimulus package as positive for 1 or 2 days. The downbeat economic assessment form BOJ this morning is fundamental negative for equities, so all in all the next week points lower in Japan. When something turns I believe in Far East to the first markets.

Targets: Nikkei 225 11.950  Topix 1.140 

Europe:

Dax (6430)  FTSE 100 (5450) 

FTSE 100 I see outright lower again next week with banks back in focus, commodities lower hurting mining and oil companies and domestic UK under pressure. DAX most likely can’t stand the global pressure, but the big German exporters get some help from the higher greenback and lower commodities.

Targets: DAX 5.650  FTSE 100 4.825 

China:

Hang Seng (20605)  Shanghai B (151)  USD/CNY (6,8705)

The Olympic Games seems to run perfect and I hope that the Chinese people also have a good time when watching the exciting games. The Chinese stock markets for sure also are exciting, unfortunately in a less positive way. As mentioned last week did the equity sell off emerge faster than expected, often this also is deeper than originally thought it would be, what I am realising now. So, what is wrong in China ? Global demand drops and in particular are wage costs exploding. In addition are foreign companies more reluctant to invest in China for the mentioned reasons plus that corporate tax has gone up – this depress the equity market as the China story isn’t hot right now. Trust me, the story will be hot again, but it requires boost in the domestic economy. I do not believe that the Chinese government just wait for better global times. The meeting activity regarding these issues within the Communist Party top indicates deep concern. China have an enormous cash pile they will use to increase public spending is my best guess. Maybe the public service sector in general, but surely to develop zones away from the coastal area with better infrastructure etc. Private consumption needs a boost, but a healthy banking sector is needed for that, I am not sure about how healthy they are despite the capital injections now and then. Chinese equities starts to look interesting, but when the market drops like this, timing is tricky. Hang Seng was hit together with China, so the target at 21020 was reached, I have set a new at 19.700 due to the global outlook.

Targets: Hang Seng (19700)  Shanghai B (rebound to 185, then down to 155)

Hot topic – The decoupling works in selected economies:

There certainly are hot topics enough to choose among. While the world is heading lower it always important to identify if some areas are performing after or where we can expect the rebound to come first. As mentioned a couple of times is decoupling on my mind as a hot topic. Last year I believed that decoupling would balance the US downturn – but that was before I realised how bad UK and Japan looked. Globally private households suffers from dropping real estate prices, stocks trading lower and partly slower or lower incomes. It naturally leads to problems for the banking sector resulting in the partly credit crunch we have right now. The emerging economies with private households that don’t depend on credits at all or only to a very limited degree still works fine plus the countries with a net oil export. I keep on looking at Far East and some interesting numbers support this view. In an article in Nikkei News, it’s calculated that among the Top 50 Japanese manufacturers did sales to emerging markets countries count for more than the combined sales to US and Europe for the period April – June this year. This is the first time it happens and it shows that something out is still alive. The numbers are relative, meaning sales to US and Europe could just have dropped more than sales to emerging economies. One sign that the development is due to healthy reasons is the fact that Japanese manufactures have increasing profitability with their emerging market business. The sales business in China of course worries short term, but the countries with low private household debt and net oil export are running ok. The active investor search for companies with a good export to these countries or good production and distribution facilities in these particular economies, but avoid high inflation areas.  

Foreign Exchange

EUR/USD (1,4700): The market is still to sell EUR/USD on a rally where 1,5000 is the current heavy resistance on the top side. Priced in the market is, that US will manage somehow and might be through the worst, where other large economies are heading towards a tropical storm. Inflation is in general expected to peak now or might even have peaked. Even central banks and some officials advocate that Q2 was the worst slowdown. The market is always right but notorious well known for overshooting. Many acts as US is back on track and through the problems, but the problems are increasing. The sub prime crisis is moving towards private prime borrowers, banks continue to write down – the credit crunch tighten it’s grid…..Many are not aware of how long lasting and difficult it is to restore banks balance sheets, so more to come from US.  What about inflation ? It’s so easy to say that commodities are lower so inflation has peaked, but the different commodity indices are 20 – 25% higher than 12 months ago, PPI’s allover the globe is sky high and wage inflation might be an issue. Fair that the market price 1 or 2 Fed hikes in, but are we sure that ECB just cut rates ? They tell us something different, supported by the August Bundesbank report that was pretty hawkish. It’s difficult to imagine a ECB rate hike, but the market is much too fast in pricing rate cuts in. The Far East region in particular is still to sell EUR/USD, but when the market gets a more balanced view on the global large economies I think that the greenback will be sold for a period – the timing is unsure. Oil could provide a relief, where a further drop will help the world but not as much as we think. The major problem for private households is a serious balance sheet problem – the debt is too high so the credit ATM is turned off, especially in US. This week I watch the US housing data during the week and the Euro Zone PMI numbers on Thursday. The market will sell EUR on soft Euro news and stay unchanged on good news as the current sentiment is very bearish on EUR.

Targets: The current range in EUR/USD is 1,4550 – 1,5050 followed by target 1,5500.

EUR/JPY (161,40) – USD/JPY (110,20): Following the ongoing Euro sales from Far East, EUR/JPY needs to trade lower. The capital flows are based on the fundamental data from the Euro Zone like described under EUR/USD. The ongoing very bad economic Japanese data and downwards corrected assessments do not influate the currency market right now. There is no reason to ignore these economic news as they will move the market one day. Last week we had Japanese Q2 GDP, industrial production and consumer confidence down in the cellar, topped by a negative assessment of the Japanese economy from BOJ this morning. The economic environment for Yen remains soft, but the capital flows dominates right now. This week I watch out for news about a possible stimulus package from the Japanese government. I do not believe it will move Japan fundamentally but it could lead to some short term swings.    
Targets: EUR/JPY 167,50 – USD/JPY 108,00

EUR/GBP (0,7850) – GBP (1,8550): One reason behind the Dollar strength was the significant shift from UK into US. It’s fair to continue to be downbeat on the British economy. The stream on bad news seems to be endless, particularly regarding the housing market. The UK housing market is in a free fall that is set to continue for some time yet. Sterling will stay under pressure for some time as long as the sluggish news  hits the market. This week I look at the retail sales on Thursday and the preliminary GDP figures on Friday, but I would say that all bad news are priced in right now. As long as EUR/USD is under pressure, then the GBP/USD target is too high, but I leave it as it is for another week. I will consider in the mean time.
Targets: EUR/GBP 0,8200 – GBP/USD 1,9025

Central bank rates

US Federal Reserve Bank: The next step is a hike from the current 2,00%. The million Dollar question is about the timing, where I would have said mid to late November if it wasn’t for the US presidential election. Early December seems more realistic.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: These people are tough on inflation. If the Euro Zone headline inflation exceeds 4,3% I go for another hike.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

Read more about all the interesting happenings in the financial markets in the outlook here below. With my private view on the consequences for the stock markets, currencies, inflation and what to expect from the central banks.

Equities

USA:

Dow Jones (11782)  S&P 500 (1305)  Nasdaq Comp (2440)

It’s ironical that the only positive signs from US lately have been from the manufacturing export sector. Seriously helped by the lower Dollar, and now they see their currency much stronger within a short time. I respect that S&P 500 have bounced back from, the bear market below 1255. It supports the current positive sentiment and makes it harder to break the crucial 1255 downwards, but it’s too early to get upbeat on US equities.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (13303)  Topix (1271)

Over the weekend we had more focus on Bank of Japans assessment of the Japanese economy – it’s called recession. Despite inflation BOJ will avoid hiking rates, which the investors like but recession is too painful for the equity market over time. I also expect Japanese shares to depreciate again, but I suggest the global reversal to happen in Far East. I believe the demand will turn upwards in Far East as the first region. Japanese equities, in particular, have priced the US slowdown more in than US stocks have i. e. Nikkei / Topix is closer to bottom out even we have a gloomy domestic outlook in Japan.

Targets: Nikkei 225 11.950  Topix 1.140 

Europe:

Dax (6575)  FTSE 100 (5530) 

Since many years I havn’t seen so many bad news out of Europe in one week. The confirmed rumours about this weeks German Q2 GDP numbers will be -1,0% was a big surprise (not noticed by many, but the German official who confirmed the rumour said that it will be between -0,75 and -1,5% i.e. it could be even worse than expected). Fair that the Euro drops in value and oil drops on a higher Dollar, but that European equities should follow the US stock market higher makes less sense. All the bad news from continental Europe will weight in the end, the only support right now is the short term positive rally sentiment. UK shares will live a bit more quiet this week.

Targets: DAX 5.650  FTSE 100 4.825 

China:

Hang Seng (21640)  Shanghai B (165)  USD/CNY (6,8550)

It’s pretty wild wherever we look. The Chinese stock market proved to be the wildest of all with Shanghai B closing at 165 today compared to 199 when I wrote last week (-16,5%, though the domestic A index didn’t drop that much). The reason why I believed in lower equity prices is that I don’t believe the Olympic Games will give a significant boost to the economy (the boost was the preparations, constructions etc.). The good question is if the concerns in the equity market about a further monetary tightning is overdone – I think so. It´s true that Monday’s PPI numbers was too high indicating more inflation in the pipeline. I keep the view that the government is more worried about growth and they will need to find ways to spur domestic growth or even to support the stock market as a short term stabilisation. Monday we also got trade balance figures from China with export beating forecasts. No direct reason to get carried away, as seen over the last 3 months it’s obvious that the export has slowed down. It should  remove some of the domestic inflation pressure but again underlines the need to improve the domestic demand. Given the overreaction in the equity market regarding rate hikes I think Shanghai B will rebound to 185, but the too slow domestic growth picture will weaken the index to 155 again. Hang Seng is trapped between the Chinese stocks and the global positive sentiment.  Until next week it points upwards for the Hong Kong stock market.

Targets: Hang Seng (21100)  Shanghai B (rebound to 185, then down to 155)

Hot topic – Inflation:

Last week I thought this weeks hot topic would be where to find help form decoupling, but given the last days events we need to have inflation in focus this time. Soft commodities have been falling since their peek in March and now oil is trading around $114 per barrel. These components will bring inflation lower, but trust me, it is more than priced in. All the 2nd and 3rd round effects the market participants happily have forgotten all about. What did Mr. Trichet tell us last Thursday? Yes, growth in Europe is dropping with a dramatic speed (it most likely took ECB by surprise) but he was just as hawkish as always and this has been supported by fellow ECB members since then. ECB worries about wage inflation, capacity constraints and the coming 2nd effects. Monday’s PPI numbers confirms that inflation won’t drop as fast as we expect. German PPI in July was 9,9% y/y which is the highest since 1981, in China PPI came out much higher and in Norway the July PPI was +31,7 y/y. Naturally inflation in the Middle East is much higher with the growing purchasing power from the oil export. I can tell that ECB is alert in this environment. The market will realize, that once more, the move was too quick and inflation will create higher volatility again. Bank of Japan and Fed should move interest rates up, but they don’t dare. The only relief was to Bank of England with a lower than expected PPI yesterday. Global inflation will stay higher than expected for a longer time than expected – sorry……

Foreign Exchange

EUR/USD (1,4930): When I wrote last Tuesday morning EUR/USD was trading at 1,5530. If anyone had told me that EUR/USD would be trading around 1,4900, I would honestly have said “dream on” My bullish EUR/USD view really have been hit, and I of course remove the 1,7335 long term target as the market now is looking for the downside. No doubt that many are reducing long EUR positions as European growth hit the wall. The Euro is in the limelight and more bad news will emerge, where I watch the German GDP on Thursday. As mentioned below, we all know it will be bad but there is a risk that it will be even worse. Thursday will be the big day with CPI from the Euro Zone and US as well, where I look for signs of second round effects. Investment flows and particularly reduction of long EUR positions is the key. Far East accounts have been unloading Euros the whole last week and they don’t seem to have finished yet. US looks relative better with Japan and the Euro Zone in poor shape but the absolute situation in USA continues to be just as unhealthy as always. I admit that the lower oil price gives some relief but don’t forget that the credit crunch is running at full speed, demand will weaken and the unemployment is rising. The market is to “sell on rallies” in EUR/USD so I set the current range at 1,4550 – 1,5050 followed by 1,5500, as I still expect nasty news from US within the next months time.
Targets: The current range in EUR/USD is 1,4550 – 1,5050 followed by target 1,5500.

EUR/JPY (163,65) – USD/JPY (110,00): Serious moves in JPY as well of course, and ongoing bad fundamental news out of Japan. The country is in recession, where it’s unlikely that the lower oil price will help to any large extend. That’s the headline, so it will be a judgement if one believe in worse figures than expected. The most interesting number is the Q2 GDP figure released this coming night. As mentioned under EUR/USD will the unloading of EUR from Far East investors probably continue this week giving further pressure in EUR/JPY. The targets in the JPY crosses I naturally  need to change as well, but I keep the EUR/JPY target and adjust the USD/JPY accordingly.    
Targets: EUR/JPY 167,50 – USD/JPY 108,00

EUR/GBP (0,7825) – GBP (1,9025): Sterling also this week will live a somewhat more quiet life with the big swings in the 3 major currencies. I still watch the domestic situation, where the conditions for the private households still declines fast. The most exciting this week are actually the CPI numbers today. I keep my view of a higher EUR/GBP, though adjusting the target from 0,8200 to 0,8150. GBP/USD I need to adjust to the current level where I expect more sideways trading.
Targets: EUR/GBP 0,8200 – GBP/USD 1,9025

Central bank rates

US Federal Reserve Bank: The next step is a hike from the current 2,00%. The million Dollar question is about the timing, where I would have said mid to late November if it wasn’t for the US presidential election. Early December seems more realistic.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: These people are tough on inflation. If the Euro Zone headline inflation exceeds 4,3% I go for another hike.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

Last week gave us sluggish news from all over the world. In Europe, where in particular, retail sales and expectation indices highlighted the worrying situation. In the States the true downturn was confirmed with low and lower revised GDP numbers plus higher unemployment. More unnoticed came from Japan also bearish fundamental figures, and in China is the Communist Party honestly worried about growth. Oil is back in the roller coaster mood as a joker for the financial markets. Very clear that the world still is on the way down, but didn’t we have any good news at all? Maybe, small signs of the US manufacturing sector might improve a bit. It was shown in 2 indices, but most clear in the less watched Kansas City Fed Manufacturing Index, that for July showed very good improvement in sales but unfortunately at a lower profit margin for the companies (the index covers a part of the Mid West) – should this make us change the view on anything? No, not at all, but it’s worth to keep the piece of information because it could indicate that the devaluation of the Dollar starts to give some aid to the manufactures in US.

The coming week we will have more Q2 earning reports from continental European companies, very important are the comments from Fed and ECB during the week, European figures and oil is back in the limelight.

Read more about all these interesting happenings in the financial markets in the outlook here below. With my private view on the consequences for the stock markets, currencies, oil and what to expect from the central banks.

Equities

General view:

The trading pattern the last 2 weeks has shown that investors rush into stocks at just small positive signs. Despite the bull attempts, the stock market ends lower or unchanged at best. So what should one believe in? Only what you see is my best answer.

As mentioned above in global macro view is the world simply still contracting, which points down for shares. During this week I think macro economic nervousness will continue to weight on global equity markets. We still need to watch the banking sector because of the big swings. Merrill Lynch sold off an enormous CDO position, but at 22 cent per Dollar. This is the first price on CDO’s in the market, but well below the book value at other banks. It means more write offs in the sector combined with further negative news on the banking exposure to private households and real estate.

Is there no good news about the patient at all? Maybe, the reversal in China and India last Friday was interesting (in China, partly due to Hu’s comments). It might give some hope for the decoupling thinking, but more on that next week if it makes sense to follow that track. The stock market will of course have full attention on the central bank statements – like all other asset classes.

USA:

Dow Jones (11284)  S&P 500 (1249)  Nasdaq Comp (2285)

In US I expect the macro economic worries to dominate the start of the week with special attention on the FOMC meeting Tuesday 5^th August. I guess Mr. Bernanke will tell us that he is concerned about the situation and the crisis will be prolonged (stocks down), plus inflation worries the Fed people. It will lead to speculations about a sooner rate hike from Fed than expected – also bearish for equities.

On 4^th August another very important economic figure of the week is released, the ISM non manufacturing index (expected 48 for July). A lower reading means a sell off for shares but a good reading will not result in the same positive reaction.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (12915)  Topix (1247)

What I like about the Japanese equities is that a US slowdown is priced more in Nikkei than in Dow Jones. I expect the reversal in Japanese stocks to be bigger than in US, but with the ongoing sluggish corporate news and reports from Bank of Japan is it too early to enter the market. I saw an interesting article in Nikkei News over the weekend saying, that profit among listed Japanese companies was down 15% in the quarter April – June, not very nice. As mentioned in the JPY FX part (see below) very important numbers are released in the middle of the week. They will set the direction for Nikkei and Topix.

Targets: Nikkei 225 11.950  Topix 1.140 

Europe:

Dax (6350)  FTSE 100 (5320) 

In Germany the Q2 earnings reporting goes on. The large exporters will mainly disappoint due to negative effects from the low dollar and rising costs. In UK, I can’t believe anything else than the difficult domestic growth outlook pressure the stock market. As many companies in the mining and oil sectors are listed in London it could lead to sell orders there as well. As mentioned earlier, European banks will also represent large swings, as all kind of macro news comes out plus more troubles form the real estate sector is to expect.

Targets: DAX 5.650  FTSE 100 4.825 

China:

Hang Seng (21827)  Shanghai B (199)  USD/CNY (6,8550)

The Chinese policy makers have understood that it’s very important to stimulate the domestic demand. It’s hard to see this happen without higher inflation, but seems to be acceptable for the government. Friday 25th July, the Communist Party’s top leaders in a meeting most likely agreed to abandon the bias towards tighter monetary policy. They also seem to try to stop the long time appreciation of the Chinese currency. All because of dropping growth, but I think that much more is needed to create a domestic demand boost, than just a correction in the monetary policy. When the domestic economic lift comes, China will be heavily interesting. One thing worth to note when looking at Chinese B shares is, that foreign large companies are complaining about rising salary costs making the production in China too expensive. If China loses competitiveness this fast, it makes it even more difficult for investors to make the right stock pick.

Targets: Hang Seng (21100)  Shanghai B (180)

Hot topic – Oil:

The roller coaster market continues. Iran, hurricanes in US, attacks on pipelines in Nigeria and the global supply/demand situation are the factors to watch. The hurricanes will disappear again – so only a temporary effect. The situation regarding Iran seems to drag on, but I don’t believe it will escalate to any military conflict – the verbal war will give intraday swings, but not change the underlying trend. The attacks in Nigeria happens so often, that I would claim it is priced in the market at any time. It brings us back to the good old supply and demand curve. There is no doubt that global demand is dropping, and pretty fast it feels. Saudi – Arabia has pumped more oil, but otherwise is supply from producers the same, but I would judge that the world has plenty of supply now. Then is the good question, how low a price the producers will accept? On 29th July OPEC’s President Mr. Chakib Khelil mentioned $ 70 – 80 per barrel if the Dollar goes up and the Iran tensions ease. The day after Mr. Shokri Ghanem, Chairman of Libya’s National Oil Corporation, reacted on the drop in oil prices (trading at $ 121 per barrel), by saying, the lower price  would only be temporary. Not easy at all to judge, but on reactions I would say that the world truly suffers with an oil price at $125, and it’s a real external shock above $135. Some relief if oil trades lower but we still need a lot of second and third round price adjustments. Then the last comment from the bear, don’t forget that oil is lower because the world simply stopped growing, so no reason to be too optimistic.

Foreign Exchange

EUR/USD (1,5530): The Dollar holds surprisingly well. It doesn’t fit to my bearish picture of the world, and I am bit puzzled about the USD strength, but it confirms the current short term bullish sentiment. FOMC Tuesday 5th August will be the first important event. With the positive sentiment for USD, then will signs of a inflation combat mood give a downward pressure in EUR/USD. It will depend a lot on Mr. Bernanke’s comments on the economic outlook. If they are as downbeat as they should be, it’s enough to take EUR/USD up again, otherwise EUR/USD will test the territory around 1,5450. Next big event is when Mr. Benankes colleague, Mr. Trichet at ECB holds his press conference on 7th August. Some speculate in a softer bias from ECB due to the risk of recession in Europe, but don’t listen to that. The ECB guys are inflation fighters and this will send EUR/USD up when Mr. Trichet speaks. I keep an eye on the Italian GDP Friday 8th August (expected flat q/q) as it could very easy be more bad news from the Euro Zone. The flow news in the market I look out for, are about Far East and Middle East sovereign types of funds who seems to buy EUR/USD below 1,5550 and others who sell around 1,5750 and 1,5950. European based corporates could start to increase their hedge ratio i.e. they need to buy EUR/USD at these levels.

Targets: The next EUR/USD target is 1,6100. Final target is 1,7335.

EUR/JPY (167,30) / USD/JPY (107,75): In USD/JPY is a fantastic battle going on around 108,20, where we have the 200 days moving average resistance line. The level has been tested several times within the last week. I would prefer that USD/JPY stays below 108,20 but JPY is getting weaker again, so it might be difficult. Bank of Japan sends many signals about a slowdown in Japan, which will be proven with more weak data from Wednesday to Friday, where the machine orders on Thursday 7th August is the most important (expected -9,5% in June). The carry trade effect with negative correlation between equities and Yen is very limited for the time being making fundamentals much more important – the result is renewed pressure on JPY. It could by the way indicate that investors have reduced their speculative long equity positions significant. More JPY selling during the week, but I it see against EUR.

Targets: EUR/JPY 167,50 – USD/JPY 104,00

EUR/GBP (0,7925) / GBP/USD (1,9585): Sterling lives a somewhat more quiet life despite the gloomy domestic news. During the coming days more weak fundamental data and bad news from the real estate sector will be released. Some point at the rate announcement from Bank of England on Thursday 7th August as very important, I don’t.  It has always been sudden investment flows that move GBP, but the timing has also always been difficult to judge. The sluggish data should give us the move above 0,8000 sooner than later.

Targets: EUR/GBP 0,8200 – GBP/USD 1,9630

Central bank rates

US Federal Reserve Bank: The next step is a hike from the current 2,00%. The million Dollar question is about the timing, where I would have said mid to late November if it wasn’t for the US presidential election. Early December seems more realistic.

Bank of England: The current 5,00% is high compared to rest of the world, so it’s very unpleasant with rising inflation as I don’t think the BoE people have the guts to hike with growth deteriorating. Unchanged for a long time ahead.

European Central Bank: These people are tough on inflation. If the Euro Zone headline inflation exceeds 4,3% I go for another hike.

Bank of Japan: They should hike with the Japanese inflation rising but another example of the central bankers being afraid of the political and public opinion. As a consequence BOJ will stay at 0,50% rest of this year.

I am looking forward to your comments and wish everybody a profitable week.

Peter

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Equities

General view: Looking at the trading pattern there are clear signs of investor appetite for equities, but I apologise, it’s too early to enter the market. Two underlying forces are dominant, and not necessarily making life easier for investors in judging the market. The swings in the stock prices for financial institutions are abnormal. Therefore they dominate the large equity indices so much that it looks like an overall trend reversal when the banking sector rebounds. It’s just a rebound, as the pressure on banks will continue. The other force (and also bearish) is the global slowdown in growth. It gives a more sliding, but very fundamental, bearish pressure in a broad range of segments within industrials, transportation, service etc. The latter force continues, and as mentioned I believe in more hits within the banking sector. The result will be even lower stock prices than we have now. In US, the banks will take more write downs on private households and small industries, in Europe real estate exposure will hit banks in Spain, UK, Ireland and partly France and Scandinavia. Chinese banks might have an unhealthy lending exposure to the domestic housing as well. That’s why only I see the latest upturn in global bank stocks as a rebound. The gold-digger should hope that the balance sheets at Japanese banks are in better shape this time (don’t rush in yet).

USA: After last weeks fairly ok Q2 earning reports from US companies I think there will be more attention on macro economic news this week. The remaining US Q2 company reports might support shares but, I watch the Q2 GDP on Thursday 31st July (expected +2,0%) and the US labour market data on Friday (expected -73k and unemployment rate at 5,6%). The private households most likely have done a good job by spending more than expected during Q2, but the drop will come in Q3 and Q4 confirming the long sliding downturn. Oil is the joker so I keep a close eye on that one.

Targets: Dow Jones S & P 500 Nasdaq 225

Foreign Exchange

EUR/USD (1,5600): Mr. John Lipsky, the IMF’s first deputy Managing Director, put everything very right in a speech on 22nd July. As he correctly said, that the Euro is overvalued due to all the currencies that are pegged to the Dollar have depreciated together with the American economy, leaving Euro with a relative strength. Mr. Lipsky also said that the greenback was very close to it’s med term value, which is something new – a good reason why it can drop a further 10% from here,  but what will be the trigger ?  The US housing market is very much in focus. We need to find the right price for assets before we have an idea about how bad the situation is for private US households, and the economy in general. Another support package for troubled house owners in USA (about 400.000) was approved by the Senate on last Saturday, but again, it can’t save the US housing market, just avoid the total meltdown. Despite more bad news out of the Euro Zone, then is the steepness in the US downturn the reason why the greenback will drop further. The biggest event this week is the US unemployment data Friday 1st August (non-farm payroll expected -73.000 and the unemployment rate at 5,6%). I judge the market sentiment right now as USD bearish, meaning a bad figure will send Dollar lower but a good number won’t help much. The interesting flows currently are from official like names. A few weeks ago some Asian central banks intervened in their own currencies by selling Dollar. Now some sovereign owned funds sells EUR/USD in the 1,5750/1,5950 area – to buy US assets I would guess, but I believe this USD appetite will be filled. In the FX option market there is growing demand for EUR calls / USD puts strike 1,6000.  The next EUR/USD target is 1,6100, the following target is 1,7335.