Global macro view:

Last week gave us sluggish news from all over the world. In Europe, where in particular, retail sales and expectation indices highlighted the worrying situation. In the States the true downturn was confirmed with low and lower revised GDP numbers plus higher unemployment. More unnoticed came from Japan also bearish fundamental figures, and in China is the Communist Party honestly worried about growth. Oil is back in the roller coaster mood as a joker for the financial markets. Very clear that the world still is on the way down, but didn’t we have any good news at all? Maybe, small signs of the US manufacturing sector might improve a bit. It was shown in 2 indices, but most clear in the less watched Kansas City Fed Manufacturing Index, that for July showed very good improvement in sales but unfortunately at a lower profit margin for the companies (the index covers a part of the Mid West) – should this make us change the view on anything? No, not at all, but it’s worth to keep the piece of information because it could indicate that the devaluation of the Dollar starts to give some aid to the manufactures in US.

The coming week we will have more Q2 earning reports from continental European companies, very important are the comments from Fed and ECB during the week, European figures and oil is back in the limelight.

Read more about all these interesting happenings in the financial markets in the outlook here below. With my private view on the consequences for the stock markets, currencies, oil and what to expect from the central banks.

Equities

General view:

The trading pattern the last 2 weeks has shown that investors rush into stocks at just small positive signs. Despite the bull attempts, the stock market ends lower or unchanged at best. So what should one believe in? Only what you see is my best answer.

As mentioned above in global macro view is the world simply still contracting, which points down for shares. During this week I think macro economic nervousness will continue to weight on global equity markets. We still need to watch the banking sector because of the big swings. Merrill Lynch sold off an enormous CDO position, but at 22 cent per Dollar. This is the first price on CDO’s in the market, but well below the book value at other banks. It means more write offs in the sector combined with further negative news on the banking exposure to private households and real estate.

Is there no good news about the patient at all? Maybe, the reversal in China and India last Friday was interesting (in China, partly due to Hu’s comments). It might give some hope for the decoupling thinking, but more on that next week if it makes sense to follow that track. The stock market will of course have full attention on the central bank statements – like all other asset classes.

USA:

Dow Jones (11284)  S&P 500 (1249)  Nasdaq Comp (2285)

In US I expect the macro economic worries to dominate the start of the week with special attention on the FOMC meeting Tuesday 5^th August. I guess Mr. Bernanke will tell us that he is concerned about the situation and the crisis will be prolonged (stocks down), plus inflation worries the Fed people. It will lead to speculations about a sooner rate hike from Fed than expected – also bearish for equities.

On 4^th August another very important economic figure of the week is released, the ISM non manufacturing index (expected 48 for July). A lower reading means a sell off for shares but a good reading will not result in the same positive reaction.

Targets: Jones 10.250  S&P 500 1.140  Nasdaq Comp 2.055

Japan:

Nikkei 225 (12915)  Topix (1247)

What I like about the Japanese equities is that a US slowdown is priced more in Nikkei than in Dow Jones. I expect the reversal in Japanese stocks to be bigger than in US, but with the ongoing sluggish corporate news and reports from Bank of Japan is it too early to enter the market. I saw an interesting article in Nikkei News over the weekend saying, that profit among listed Japanese companies was down 15% in the quarter April – June, not very nice. As mentioned in the JPY FX part (see below) very important numbers are released in the middle of the week. They will set the direction for Nikkei and Topix.

Targets: Nikkei 225 11.950  Topix 1.140 

Europe:

Dax (6350)  FTSE 100 (5320) 

In Germany the Q2 earnings reporting goes on. The large exporters will mainly disappoint due to negative effects from the low dollar and rising costs. In UK, I can’t believe anything else than the difficult domestic growth outlook pressure the stock market. As many companies in the mining and oil sectors are listed in London it could lead to sell orders there as well. As mentioned earlier, European banks will also represent large swings, as all kind of macro news comes out plus more troubles form the real estate sector is to expect.

Targets: DAX 5.650  FTSE 100 4.825 

China:

Hang Seng (21827)  Shanghai B (199)  USD/CNY (6,8550)

The Chinese policy makers have understood that it’s very important to stimulate the domestic demand. It’s hard to see this happen without higher inflation, but seems to be acceptable for the government. Friday 25th July, the Communist Party’s top leaders in a meeting most likely agreed to abandon the bias towards tighter monetary policy. They also seem to try to stop the long time appreciation of the Chinese currency. All because of dropping growth, but I think that much more is needed to create a domestic demand boost, than just a correction in the monetary policy. When the domestic economic lift comes, China will be heavily interesting. One thing worth to note when looking at Chinese B shares is, that foreign large companies are complaining about rising salary costs making the production in China too expensive. If China loses competitiveness this fast, it makes it even more difficult for investors to make the right stock pick.

Targets: Hang Seng (21100)  Shanghai B (180)

Hot topic – Oil:

The roller coaster market continues. Iran, hurricanes in US, attacks on pipelines in Nigeria and the global supply/demand situation are the factors to watch. The hurricanes will disappear again – so only a temporary effect. The situation regarding Iran seems to drag on, but I don’t believe it will escalate to any military conflict – the verbal war will give intraday swings, but not change the underlying trend. The attacks in Nigeria happens so often, that I would claim it is priced in the market at any time. It brings us back to the good old supply and demand curve. There is no doubt that global demand is dropping, and pretty fast it feels. Saudi – Arabia has pumped more oil, but otherwise is supply from producers the same, but I would judge that the world has plenty of supply now. Then is the good question, how low a price the producers will accept? On 29th July OPEC’s President Mr. Chakib Khelil mentioned $ 70 – 80 per barrel if the Dollar goes up and the Iran tensions ease. The day after Mr. Shokri Ghanem, Chairman of Libya’s National Oil Corporation, reacted on the drop in oil prices (trading at $ 121 per barrel), by saying, the lower price  would only be temporary. Not easy at all to judge, but on reactions I would say that the world truly suffers with an oil price at $125, and it’s a real external shock above $135. Some relief if oil trades lower but we still need a lot of second and third round price adjustments. Then the last comment from the bear, don’t forget that oil is lower because the world simply stopped growing, so no reason to be too optimistic.

Foreign Exchange

EUR/USD (1,5530): The Dollar holds surprisingly well. It doesn’t fit to my bearish picture of the world, and I am bit puzzled about the USD strength, but it confirms the current short term bullish sentiment. FOMC Tuesday 5th August will be the first important event. With the positive sentiment for USD, then will signs of a inflation combat mood give a downward pressure in EUR/USD. It will depend a lot on Mr. Bernanke’s comments on the economic outlook. If they are as downbeat as they should be, it’s enough to take EUR/USD up again, otherwise EUR/USD will test the territory around 1,5450. Next big event is when Mr. Benankes colleague, Mr. Trichet at ECB holds his press conference on 7th August. Some speculate in a softer bias from ECB due to the risk of recession in Europe, but don’t listen to that. The ECB guys are inflation fighters and this will send EUR/USD up when Mr. Trichet speaks. I keep an eye on the Italian GDP Friday 8th August (expected flat q/q) as it could very easy be more bad news from the Euro Zone. The flow news in the market I look out for, are about Far East and Middle East sovereign types of funds who seems to buy EUR/USD below 1,5550 and others who sell around 1,5750 and 1,5950. European based corporates could start to increase their hedge ratio i.e. they need to buy EUR/USD at these levels.

Targets: The next EUR/USD target is 1,6100. Final target is 1,7335.

EUR/JPY (167,30) / USD/JPY (107,75): In USD/JPY is a fantastic battle going on around 108,20, where we have the 200 days moving average resistance line. The level has been tested several times within the last week. I would prefer that USD/JPY stays below 108,20 but JPY is getting weaker again, so it might be difficult. Bank of Japan sends many signals about a slowdown in Japan, which will be proven with more weak data from Wednesday to Friday, where the machine orders on Thursday 7th August is the most important (expected -9,5% in June). The carry trade effect with negative correlation between equities and Yen is very limited for the time being making fundamentals much more important – the result is renewed pressure on JPY. It could by the way indicate that investors have reduced their speculative long equity positions significant. More JPY selling during the week, but I it see against EUR.

Targets: EUR/JPY 167,50 – USD/JPY 104,00

EUR/GBP (0,7925) / GBP/USD (1,9585): Sterling lives a somewhat more quiet life despite the gloomy domestic news. During the coming days more weak fundamental data and bad news from the real estate sector will be released. Some point at the rate announcement from Bank of England on Thursday 7th August as very important, I don’t.  It has always been sudden investment flows that move GBP, but the timing has also always been difficult to judge. The sluggish data should give us the move above 0,8000 sooner than later.

Targets: EUR/GBP 0,8200 – GBP/USD 1,9630

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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