Below you will find my weekly view on the very challenging financial markets. In my view it is still too early to enter anywhere with the strategic investments apart from oil – please read the Hot Topic below this entry. The China update every week is worth to read as China will overcome……

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.

Currency markets – Capital flows are still making the lead.

EUR/USD (1,2710): Last week I thought it was time to focus on fundamentals. It turned out to be wrong and we are back in the situation where other currency pairs and equities decide EUR/USD movements. It’s difficult to say what economy looks worst but I keep my opinion that US is in the steepest downturn, leading to a rebound in EUR/USD one day. EUR/USD is nicely trading in the 1,2500 – 1,3000 range but a 1,2400 – 1,2900 is the one for this week.
The range trading in EUR/USD is a sign that the isolated EUR/JPY selling has stopped. We need to watch out for new lows in European equities. At that level further long European equities / short Yen could be closed.
The most interesting fundamentals this week are out of US, but they are not that serious as all eyes are on growth numbers. The US housing starts on Wednesday (expected 780k) I watch and then Philly Fed on Thursday (expected -35,0).
As I had the expectation of fundamentals returning as the key driver in FX I raised my target. I need to put it back to the range followed by 1,3250

Target: Range 1,2400 – 1,2500 followed by 1,3250.  

EUR/GBP (0,8460) – GBP (1,5020): 1½ weeks ago Bank of England surprised with 150 basis points. Last week they chocked the market with one of the most bearish central bank outlook I have seen for a long time. I thought all negative news was priced in but that was certainly not the case.

Regarding Sterling it’s more fundamentals deciding the trend compared to other currencies. Growth outlook is in focus but also public borrowing gets attention now. The political and central bank comments mean more than economic data. That’s what I keep an eye on this week.

The only good thing about the recommendation last week was the stop loss at 1,5420. The target was of course totally wrong. The economic situation in UK is gloomy, also more than in rest of Europe. Sterling will remain under pressure after the last Bank of England report. Depending on news about public finance I have the feeling that GBP will rebound a bit, and then we need to see what happens.

Targets: EUR/GBP 0,8250 – GBP/USD 1,6500 / stop loss 1,5200.

EUR/JPY (123,35) – USD/JPY (97,05): Good swings in JPY is still the case but as mentioned under EUR/USD it’s not limited to EUR/JPY anymore. Capital moves towards Japan sent EUR/JPY to the target of 118,50 last week, though also partly caused by EUR/USD trading lower instead of higher.

All economic data from any country is negative but I need to mention the Japanese GDP numbers. Not only was July – September negative but the April – June was revised further down. Some recessions have been technical recessions with 0,1 or 0,2% negative growth in 2 quarters. This time the numbers are very different – unfortunately.

If fundamentals decided the JPY trend, Yen would be much lower but the capital flows is the name of the game. Watch the stock market comments, it’s where the clues are. I keep the targets.

   
Targets: EUR/JPY 118,50 – USD/JPY 90,00.

Equities – Any good news left ? Certainly, the price for the last one was $700 bio, how much next ?

Nikkei 225 (8.523)  Topix (850)  Dax (4.616)  FTSE 100 (4.174) Dow Jones (8.497)  S&P 500 (873) Nasdaq Comp (1.517)  

Let’s start wit G20. G7 never really agreed on something apart from where to meet next time. Should it be easier when 20 countries needs to agree who should suffer the most (remember we are in a downturn – it’s not growth we are sharing) – to be honest I doubt it (please also read the China part).
They agreed to control the financial sector more. It might be correct to do so, but it doesn’t bring any growth right now. On the contrary will banks be more reluctant to do anything at all, including lending money out.
The coordinated fiscal driven global growth plan was postponed is my feeling. Or each country goes back home to support the domestic economy.
It’s ok that equity markets react negative as it underlines how serious the situation is. The politicians have realised how badly the global economy is looking and the markets can smell it.

As mentioned several times, is what we go through now the consequence of a credit bobble that busted. The asset markets are repricing, it’s very painful, but not a punishment of anybody. It feels like a punishment and those with high debt ratio’s are feeling this in particular.

If we believe in repricing of assets, there will be an overshooting on the downside, meaning cheap assets can be bought at a certain time. The golden question is, if one should buy at -25% or -90%? Too early to say, I can just repeat, don’t buy yet.

I feel it’s a bit overdone to mention any macro news from last week as they were all between very bad and awful.
No wonder that the G20 people are unhappy about the situation. They can’t avoid the recession, but should focus on avoiding the depression.
It seems sensible to use fiscal policy to fight the depression, but the good news cost a lot of money now. My best guess is that financial institutions will require more money. The automobile and automotive sector is the next to be rescued – how much do you want to pay? The rescue till come but not jobs will be saved, meaning more unemployed but not so many that we enter a depression.

Apart from the Chinese stocks (please read below) I still watch one thing in the Japanese market. Last week I wrote about the Japanese GPIF fund might buy stocks short term. Naturally it’s hard to get precise information, but during several sessions the Japanese morning is fairly negative but then the market turns back to almost positive territory followed by another sell off. A trading pattern that indicates a big player is in the market.

In US we actually reached the 820 in S&P 500 last week followed by an enormous rebound. I don’t regard the target as reached in the way that there is any need to change it. The rebound indicates that 820 in S&P 500 is a very interesting level (don’t buy even if we touch).
It also confirms that we enter a life where people buy shares for different reason. Long term technical support, emotional reasons like it feels cheap, or it’s a well known must have company. Different factors that aren’t based on rational thinking. Within the last days I have spoken with several private investors, who simply are happy to buy now – one day it will take over…..

In absence of true important macro economic figures this week, the markets will be dominated by the underlying macro gloomy outlook. Now and then with emotional or technical caused buying.
Just a few earning reports from US this week, Home Depot Inc. on Tuesday and Dell, Inc. is out Thursday.
 

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 – Mainland stocks should have gone down but they went up……

Hang Seng (13.529)  Shanghai B (110)  USD/CNY (6,8235)

As discussed last week, the Chinese stimulus package was good news if the headlines were the truth. As mentioned, some economists took the news cautious and they were right to do so. Ahead of the weekend (but late enough so the G20 participants learned about it after the summit), it became clear that the stimulus package in reality is ¼ of the promised amounts. The rest (after all 75%) is planed to come from commercial banks, regions and other sources, but very unfortunate it is less realistic.

The Communist Party was very smart to let the stimulus package news overshadow the partly very bad news during last week. Fair, the Chinese equity market was buoyant, but maybe strange that it continued this morning, despite the adjusted details about the stimulus package.
 
There are rumours about a large government backed stabilisation fund in the size of RMB 600 – 800 billion aimed to support the domestic A shares.
As usual is nothing really confirmed but it sounds very possible. This was another key to the 17% rebound in A shares last week (B shares went 8% up).
At what level the fund gets active (if at all) is the current speculation, but some point at 1500 in Shanghai A as very important. That’s 30% down from today’s close, but when the plan was thought out the index was trading at 1800.

Last week I mentioned that some funds might be running short positions in Chinese B shares. If some are closed out I can’t say, but it of course fuels the upside.

I keep the targets for Hang Seng and Shanghai B. The reason is as mentioned several times earlier that I regard the globally bearish markets as the biggest danger to Chinese stocks. China will feel the global crisis even more, but the government is of all governments, the most active in supporting the domestic demand.

This leads to a line on USD/CNY. People’s Bank of China’s Zhou Xiaochuan hinted that China might let their currency depreciate. China also announced more export rebates (another word for subsidies) so they just need to restrict import, then they are running a full blown protection policy. All announced the days around the G20 summit – it look’s difficult for G20.    

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 my view.

Bank of England: Now at 3,00% and they will take the base rate lower is they find it necessary.  

European Central Bank: Further cuts are already priced in. Some ECB members signalised another 50 is possible, and it seems to happen before Christmas.

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

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

Peter

Bookmark It