The wild times simply continue. The FX market is manageable, it’s good to be a bear on stocks but I have been forced to change my Fed view. I predicted a rate hike in December, but it’s a cut in October. Not that I think it’s a good idea but that’s how life is.

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

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