The week ahead for U.S. markets will be a function of the macro economic indicators that are to be released on the back of the positive news released last week regarding support for peripheral Europe from the European Central Bank pushed markets higher. The Dow closed +1.97% for the week ending July 27, as the short covers and long buyers came in to push the index beyond its 200pt drop from Monday’s opening. Major construction & Big Pharma stocks largely gained the most on a percentage basis as global economic sentiment improves as the ECB enables the German export economy. The NASDAQ closed +1.12% and the S&P500 closed +1.71%, each trailing the gains of the Dow. The NASDAQ closed near its July 19th high. A stronger € relative to the $ given a more positive economic outlook for Europe has advanced stocks such as Apple, Adobe Systems, Priceline, & PACCAR for the NASDAQ whilst the S&P stocks such as Aflac, Aetna, Abercrombie & Fitch (thought I’d throw that in here) & Agilent Technologies experienced large percentage gains.
The week ahead should test higher lows for the index given the policy actions announced by the ECB along with the macro economic reports. The recent downside of 12500 for the Dow could see a new floor of 12640 should the USD strengthen, which given the recent increase of the € from $1.21 to 1.23$, the Dow and U.S. indices in general should remain above 12640 as Personal Income, ISM, Factory Orders, & Hourly Earnings, should each beat expectations.
Central & South America
The Merval fell -0.95% as short covers pushed the index higher to close above -1.00%. The index is currently in the middle of a 1 month trading range of 2390 to 2500 w/the market activity mid-range of 2436. As Europe improves, the index should not sell off relative to any economic uncertainty from the U.S., which will keep the index above 2390.
The IBOVESPA closed +4.35% as the eurozone outlook improves with an increase in expected demand for Brazilian imports. The index is at its July 5 high and approaching its June 20 high of 57167. As the index had been setting lower highs since June 20, the +4.35% moves supports the notion of improved eurozone sentiment by way of Brazilian exports to European markets. The floor for the week ahead is 54005 as the index is likely to capitulate with sentiment remaining bullish.
Improved economic sentiment pushed European markets higher with the IBEX35 +5.94% & MIB +4.05% experiencing significant gains. Repsol & Telefonica experienced significant buying volume. All European markets benefited with a major bounce off of a perceived bottoming of valuations relative to historical trading ranges on European indices. The EFSF has approximately 50% remaining from its initial +€400B to which either Spanish banks or sovereign Greece can receive much needed funding. The market sees Spain as a viable long-term risk given the limited lending capacity at the moment.
European indices should continue to make higher lows going forward.
Asia, Middle East, Oceania
The Bank of Japan is expected to initiate further easing by purchasing outstanding long-term debt and by lowering interest rates. Japan must still import its energy with internal demand for domestic products remaining weak given the continuing demand for Japanese exports. Japan continues to experience rising manufacturing costs relative to the strong yen with exports remaining price prohibitive to global middle class consumers. For such reasons, Honda has continued to underperform the index. The Nikkei225 closed -1.19% for the week. The floor for the Nikkei for the week ahead is 8470.
China’s indices including the Shanghai composite & the Hang Seng closed down -1.84% & -1.86%, respectively, as weakness for Asian exports have caused the indices to trade lower given the demand for European exports and European demand for FTA goods. The Shanghai composite is approaching its March of 2009 lows and will likely reach that level. For the week ahead, I am bearish on the Shanghai to fall below 2100 and am mildly bullish on the Hang Seng above 18900.
The BSE closed -1.86% while the TA100 closed -0.68% for the week. The BSE has support at 16800 with the TA100 seeing support at 960. Given the strength from Europe, I am more bullish on the TA100 more so the BSE.
Australia closed +0.25% & New Zealand +1.09% as the Aussie continues to climb against the NZ dollar. The ASX200 is approaching its May15 highs, which is pivotal when considering the higher highs the index have been achieving over the Fall/Winter. The NZ50 index is approaching its highest levels since mid-May. The FTSE New Zealand All Cap index has outperformed the ASX200 over the past yr. However, the ASX200 over the past month have outperformed New Zealand equities.
U.S. treasuries are experiencing an upward trend in momentum to which the 10yr, & 30yr are seeing capital outflows & rising yields. The 2yr, however, continues to see inflows and is trading lower. The at-risk bonds of peripheral Europe have been falling & will likely remain range bound.
Greece: 24.50% to 25.50%
Spain: 6.50% to 6.90%
Italy: 5.85% to 6.10%
The Japanese 10yr is still falling and will continue to trade below .83%. The Australian & New Zealand 10yr bond yield is rising along with the market value of the stock exchange w/in each respective nation. The yield on the Australian 10yr could rise to 3.14% with a downside of 3.02%; New Zealand’s 10yr has risen considerably given recent movement & could rise to 3.60%.
Gold is approaching the upper-bound level of $1650tr/oz & will remain higher as the dollar remains lower-bound. Gold is also under accumulation. The spread b/t NYMEX & Brent has narrowed and widened between $14 & $15 with upward volatility on each crude. The spread has since widened to over $16 and will likely continue to widen as the European economy improves w/an expected U.S. 2nd half economic slowdown.
The euro dollar certainly is a resilient pairing. One can hardly believe the trade once existed at below parity. The short-term range of $1.21 to $1.24 per € is a largely a function of the movement of the broad basket dollar index. As the DXY remains lower-bound to a short-term trading range, the £ & ¥ will remain strong against the $ & the €. The Brazilian real & the Indian rupee is likely to remain lower-bound (27.19 to 27.05) with greater downside volatility in the short-run as the RBI of India plans to reduce inflationary pressure.
Have a wonderful week ahead.
Vidia – Ricochet Alternative Asset Management