The greenback went up and oil down, and that rescued the whole financial world including the investors. Such a sudden and happy end on a bear market sounds too good to be true, and it is.

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

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