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. But please follow the China update every week, this is where I believe the first opportunities will come. The Hot Topic this week is about oil, I argue why the best for the world is a higher oil price to around $85 per barrel.

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

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