FXIS Market Insights

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Charts
• All About Oil
• Connecting The Dots

Weekly Snapshot
• Chinese premier Wen Jiabao declares inflation victory (FT)
• New orders for durable goods in the U.S. increased 1.9%, to $195.6bn (ESA)
• U.S. real GDP grew at an annual rate of 1.9% in the first quarter of 2011 (ESA)
• U.S. new home sales down 2.1% from April level, but up 13.5% a year ago (ESA)
• International Energy Agency will release 60m barrels of oil next month (MSNBC)
• The Fed held interest rates, no hint of further asset purchases (FT)
• Fed cut its forecast for 2011 GDP growth to 2.7%-2.9% from a 3.1%-3.3% (AP)
• U.S. existing home sales fell 3.8% in May; down 15.3% from a year ago (AP)
• Bank of England hints at second round of quantitative easing (Reuters)
• John Paulson's hedge fund lost $500m from investment in Sino-Forest (Economist)
• Greek Prime Minister survives vote of confidence (FT)
• Japan's exports fall 10.3% yr/yr versus forecast 8.4% drop (Reuters)

Weekly Barometers

Weekly Chart  
Lots of interesting developments in the commodities markets this week.  Here’s a neat chart, courtesy of FT.com, reminding us how energy markets and political developments have always been deeply interconnected.

Source: www.ft.com

All About Oil 
When the International Energy Agency decided to release 60 million barrels of oil from its strategic oil reserves over the next month, the markets were taken somewhat aback.  Oil prices tumbled on the news putting more downside pressure on an already shaky commodity weakened by a sluggish economic recovery. The announcement stirred up quite a bit of a debate among analysts.  A perfectly timed announcement one might think as the West sends a clear signal on oil to some of the oil producing countries who elbowed OPEC into not increasing the supply of oil in their recent meeting. 

Although the IEA’s role is not to manipulate prices, several said they saw it as a more of a policy move designed to bring down commodity prices at a time when western governments are struggling with unemployment that remains high and consumers that are hurting from high commodity prices.

Libya’s conflict and the often quoted supply-disruption argument is clearly visible in the difference between the two most widely watched oil futures contracts:  Brent Crude Oil traded in London and Light Sweet Crude Oil (West Texas Intermediate Contract) traded at NYMEX.  In recent months the roughly $15 premium of Brent Crude over Light Sweet Crude had many traders baffled into thinking this would be a temporary anomaly. Not quite as we learned…

This unusual price difference was recently examined by Izabella Kaminska in her post:  WGO – What’s going on in Brent-WTI?

Whether it is the supply shortage or the rise of a new type of contract that will dominate prices in this market remains unclear.  It also remains questionable to what extent the IEA and other governmental organizations can actually influence commodity prices in the long term. However, we have now arrived at a price level that has captured some traders’ attention as they evaluate technical and momentum factors in their next trading decision.  Although we don’t like to commit to a specific price target, you can rest assured that oil prices won’t stay here for an extended period of time.  Traders already staked out numerous price targets on both sides of the trend line.  Having just taken some profits from this week’s clear sell signals, I am staying on the side lines for now. But like many others, I will be watching closely to see which side of the trend line these prices will be on next week.

Connecting The Dots 
It isn’t every day that the president of a country writes an op-ed piece, let alone the premier of a major global economic power like China.  Please consider: How China plans to reinforce the global recovery by Wen Jiabao

I’m not quite sure what to make of this article but it does feel strange it would appear now.

Similarly, one must question the intent and timing of this week’s IEA’s decision to try and keep a lid on energy prices.  This leaves us to wonder what, if any, ulterior motives might be at play here.  Below are some recent events and news stories that cry out for someone to connect the dots and tell us if there are indeed too many coincidences.  Who would like to connect the dots?

• Fed cuts U.S. economic growth forecast
• Fed holds interest rates on hold but is concerned about inflation
• $14.3 trillion U.S. debt ceiling - out of cash in August
• IEA decides to release 60m barrels of oil from strategic reserves
• Oil price plunges over 4% on Thursday
• China's food price inflation at record levels
• Concerns about Chinese property prices
• Hedge fund loses $500m from investment in Sino-Forest
• Chinese Premier Wen Jiabao writes an op-ed piece in the Financial Times
• Hang Seng snaps three-week losing streak, ends up 1.9%
• Shanghai up 2.2%, its biggest intra-day gain in four months
• Chinese banks see biggest jump on HK and Shanghai bourses

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Charts
• Lines In The Sand
• Recommended Video

Weekly Snapshot
• U.S. leading economic index increased 0.8% in May to 114.7 (Conference Board)
• U.S. headline inflation rate in May rose 3.6% from a year earlier (Economist)
• Euro area annual inflation was 2.7% in May down from 2.8% in April (Eurostat)
• U.S. housing starts up 8.7% from April and 5.2% above May 2010 (US Census)
• India raises key interest rates by 0.25 percentage point to 7.50% (WSJ)
• Yields on Spanish 10-year bonds at 5.6% - highest in a decade (FT)
• U.S. trade deficit increased to $119.3 billion in the first quarter of 2011 (BEA)
• Chinese consumer prices rose 5.5% in May; biggest increase in 3 years (FT)
• China's politically sensitive food prices surged by 11.7% (Economist)
• S&P cuts Greece's longterm credit rating by three notches to CCC (FT)
• The Bank of Japan has kept its key interest rate at 0%-0.1% (Bloomberg)

Weekly Barometers

Weekly Chart  
It was all about the Greek credit crisis again this week.  Images of violent protests in the streets of Athens sent shock waves through the financial markets squeezing the nervous investors’ arteries just a little tighter still.  Greek government bond yields spiraled into stratospheric levels.  After some of the ratings agencies dealt Greece a final blow declaring them essentially at default level, the yield on the 10-year Greek government bond touched 18%.  Worse still, the 2-year and 3-year bond yields shot up to about 30%.  Unthinkable for a European country one might assume; then again, investors’ memories are notoriously bad.  Those who had witnessed the Greek financial tragedy early last year, had been warned that there might be a slight problem with Greece’s ability to pay back its creditors. 

In our article: A Series Of Unfortunate Events For Europe, we highlighted some of the important events leading up to the crisis. 

The ongoing struggle to implement austerity measures has run its course; no significant improvement of their government coffers have been made which is why Greece is back to square one.  Worse than that in fact, since they now have to borrow at essentially twice the cost of capital from a year earlier.  When Monsieur Sarkozy and Frau Merkel embraced in harmony to come up with yet another negotiated bailout compromise of some sort, the market breathed a sigh of relief for a moment.  While the Euro faired remarkably well, all things considered, it remains questionable how much longer the Greek tragedy can continue.  Greece is clearly at a point where it will be increasingly difficult to find able and willing creditors. In this country we know what it means to “kick the can down the road” all too well.  Lessons to be learned?

Lines In The Sand 
Last week, we discussed the notion of lines in the sand suggesting that a price level of 1250 for the S&P 500 might be one of those important technical support levels where many traders hinge their next moves upon.  The line in the sand has been holding but we came fairly close to it when the S&P 500 touched the 200-day moving average on Thursday. 

Since March 2009, the market has made a remarkable recovery.  Considering a still rather sluggish recovery on main street, the market is now looking for the next impetus to move higher.  What is your take, will 1250 hold or will we step back into the uncomfortable bear market territory again? 

Recommended Video
If you were to leave it up to Professor Robert Schiller, the question above would turn into a rather gloomy prediction.  He believes that stocks are about 40% overvalued based on his cyclically-adjusted PE ratio (CAPE).  Please consider his explanation as to why markets are in for more downward pressure.

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• Lines In The Sand
• Recommended Read

Weekly Snapshot
• Dow sinks below 12,000; stocks had the 6th straight weekly loss (AP)
• China posted a smaller-than-expected trade surplus in May of $13.1bn (Reuters)
• The average US homeowner now has 38% equity, down from 61% a decade ago (AP)
• Fed surpassed China as the largest holder of U.S. Treasuries (Reuters)
• ECB kept interest rates at 1.25% but signalled July rate hike (CNBC)
• Brazil increased interest rates by 25 basis points to 12.25% (Economy.com)
• Revised data showed Japan's economy shrank 0.9% in the first quarter (Reuters)
• U.S. trade deficit narrowed by 6.7% in April to $43.7 billion (AP)
• Fitch warns: U.S. Treasuries could be rated junk in August(Reuters)
• Fed survey: Economy falters in several US regions (AP)
• Euro area GDP rose 2.5% compared with the first quarter of 2010 (Eurostat)
• Bernanke signals that the Fed is not planning to ease monetary policy (FT)
• Industrial producer prices for April rose 6.7% y/y in Euro area (Eurostat)
• OPEC unexpectedly decides to keep oil production output unchanged (AP)

Weekly Barometers

Weekly Chart  
QE2 (Quantitative Easing) is coming to an end this month.  Sounds like a good time to assess some of the impacts of the Federal Reserve’s recent asset purchases. Please consider our weekly chart courtesy of Global Macro Monitor.  In case you were wondering why interest rates are still at rock bottom, here is part of the answer.  However, as many prominent names including PIMCO’s CEO Bill Gross have been asking: What happens when the Fed stops purchasing treasuries? 

Lines In The Sand 
Another week, another big sell-off and I can’t help thinking how much this market reflects the “June-Gloom” weather here in Southern California.  We have been looking at the S&P 500 chart with a cautious approach for quite some time now and suggested that there is some considerable risk for a market correction.  In one segment we referred to Barry Ritholtz who recommended drawing some lines in the sand.  How much pain are you willing to take in terms of your portfolio?

There is some hope though in that the majority of traders seem to agree where that line in the sand is; 1250 on the S&P 500 has been the consensus for a major support.  Most of the chartists seem to point to that level as a hard line in the sand.  This also suggests a sort of self-fulfilling prophecy might be at play here - it is the main reason why technical analysis works in the first place. When enough people believe 1250 to be a strong support, it may actually come true. 

1249 was the previous low earlier this year.  This week, we came one step closer to that all-important support of 1250.  Yet, the momentum is also slowing down suggesting that the sellers have been reducing some of their positions recently.

 

What’s next for you?  If your time horizon is short-term, you would have been stopped out of the market some time ago already.  As for those who have a slightly longer investment horizon, you may want to draw your own line in the sand, perhaps not directly at 1250 but somewhere close enough below it.  How much pain you are comfortable with determines your line in the sand. 

Recommended Read
One month ago, we brought up the good old “Sell in May” rule which suggests to exit the stock market and wait until the end of summer to consider buying stocks again.  So far it looks like the old saying is spot on and it shows that investors actually acted upon the rule.  Please consider Michael Mackenzie & Michael Stothard’s FT article which notes that US equity outflows are the largest in 10 months.

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Here is our latest issue of market insights. Enjoy!

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• Recommended Read
• Recommended Video

Weekly Snapshot
• Moody's sounds alarm over U.S. debt limit and deficits (Reuters)
• US Dollar at yet another record low against Swiss Franc on Friday
• U.S. economy ads just 54,000 jobs as unemployment rises to 9.1% (FT)
• Brazil’s economy reported annual growth of 4.2% in Q1 of 2011 (Economy.com)
• Moody’s cut Greece's credit rating by three notches to Caa1 from B1 (FT)
• Euro area annual inflation is expected to be 2.7% in May 2011 (Eurostat)
• The yield on the 10-year Treasury sank below 3% for the first time this year (AP)
• The Euro area seasonally-adjusted unemployment rate was 9.9% in April (Eurostat)
• U.S. consumer confidence index fell to 60.8 from a revised 66 in April (AP)
• India's economic growth rate slowed again to 7.8% in Q1 of 2011 (Economist)
• U.S. home prices declined by 4.2% Q1 of 2011; lowest point since 2006 bust (AP)

Weekly Barometers

Weekly Chart  
Friday’s employment report was a bit sobering.  The U.S. economy was only able to create 54,000 new jobs, much less than the roughly 150,000 expected by economists.  This is aggravated by the fact that the U.S. economy needs to ad at least 100,000 new jobs each month just to keep up with the demographic trends of a steadily growing population. In real terms then, the U.S. economy actually lost about 50,000 jobs last month and that is of course disconcerting for the financial markets as well as the viability of an economic recovery already standing on rater shaky legs.

The chart below compares the job losses during the most recent recession with those of prior periods.  Technically, the economic recession has been over for quite some time now.  However, the employment recession still lingers on.  The possibility of  double-dip recession is very much dependent on the outlook for jobs.  Let us hope that the slow but steady trend in this chart continues to improve.

Recommended Read
Please consider John Drzik's guest column in the Financial Times: Price volatility is here to stay.

Recommended Video 
Here we are again with a short technical outlook on the markets.  One day before the all important U.S. jobs report, Jeff Macke made a very good call when he suggested:  “Brace yourself and if you are nervous about the markets, sell until you can sleep! “

Indeed, you had to brace  yourself when U.S. equities nose-dived after a less than favorable jobs report on Friday. As John Drzik’s article above suggested, price volatility is here to stay. This is true not just for commodities but also for equities. Trading of shares, particularly individual stocks, continues to show signs of commodity-like price behavior.  Brace yourself or better yet, wear a seat-belt when navigating the financial markets. 

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.