Global macro view:

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

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