Vantage FX | Dollar Yen afraid of 100, Aussie pressured, earnings season going poorly | 23 April 2013

April 23, 2013

Stocks were up in most of Europe and in the US as well but there are growing signs that earnings season is going the wrong way and that the market is becoming vulnerable once again. After starting off fairly strongly earnings are starting to disappoint. This morning on MarketWatch I saw the following

So far, the first-quarter’s runway show has clashed with expectations.

Of the 103 Standard & Poor’s 500 companies that have reported, 50% beat earnings per share estimates, 43% beat on sales, and 24% excelled on both measures, according to analysts at Bank of America Merrill Lynch.

What does this say about the U.S. economy and stocks? Corporate America has seen better.

“This is lower than the proportion of positive surprises we observed last quarter, and below historical average levels,” the Bank of America researchers noted drily.

Indeed as you can see in the graphic from Goldman Sachs via Business Insider earnings results are badly missing the average of the last 40 quarters at the moment and fully a third of S&P 500 companies report this week. That being said it is therefore important to note that there is no point getting bearish before the announcements but it is worth keeping an eye on and certainly something to consider for the future as the big reversal in the economic surprise indices for the G10, US, Europe and China are all signalling that the global slowdown being signaled by Dr Copper. Indeed even though the focus over the past week or so has been on the shenanigans in the Gold market it is worth noting that LME Copper has dropped around $11oo or about 13% per tonne this year and the slide has accelerated over the past month.

So while we aren’t saying necessarily that the S&P or any other equity market is about to crash or even just sell off because this is a strange world goosed by free money where fundamentals don’t seem to matter – until they do. but we are watching the 1520 level we have identified in the S&P 500 as a key indicator that a deeper retracement has begun.

At the close of play the Dow was up 0.13% even though Existing home sales were disappointing falling 0.6%, the Nasdaq rose 0.87% and the S&P 500 was up 0.50%. Key to the above discussion was the report by Caterpillar which characterised as the

largest maker of mining equipment, posted disappointing first-quarter earnings, cut its 2013 forecast and lowered “significantly” its outlook for demand from commodities producers.

So the fact that its shares actually rallied seems incongruous – but that is equally important as the free money makes all news good news – at least for the moment.

In Europe stocks were higher except in London where the FTSE fell marginally by 0.09%. The CAC was flat, the DAX rose 0.24%. Spanish and Italian stocks roared higher up 1.42% and 1.66% respectively after the re-election of the Italian President and his speech to Parliament where he blasted  the politicians for not being able to form Government and asked for a grand coalition to be formed fairly briskly. Why this caused stocks to rally so hard is difficult for your humble analyst to fathom but hey – that’s equities for you.

Now, to Global FX Land

The battle for 100 is really very interesting in USDJPY at the moment with the US dollar unable once again to breach this level. We have been saying for some time now that someone or something is sitting there and the price action is once again suggestive of that. In yesterday’s summary of the CFTC Commitment of Traders positioning report we mentioned that the Yen shorts around 78,000 are still in the top quartile of shorts for the past 12 months with the high around 94,400 so it could just be the case that the market is well short of Yen and doesn’t have a lot of room left to sell. Certainly it looks that way for the moment.

As you can see in the 4 hour chart above the box we have placed the USDJPY – indeed the box the price action it has placed itself in – was reinforced overnight with a high of 99.88. USDJPY will eventually break 100 most likely when whatever is at 100 rolls off and from there it will probably run a few big figures but part of the preconditions for the punch through 100 is likely to be the need for the market to get a little short Dollars there not the structural long that is in evidence – so it could be a little more trade the range type play yet.

The Aussie dollar is very interesting as well. Yesterday the NAB put out a piece saying that the collapse in gold over the past week would normally knock another 3.5 cents of the “fair value” of AUDUSD but that,

 the correlation has broken down in the past two years and we are not rushing to downgrade our AUD/USD forecasts

We find this really interesting because certainly correlations come and go but it is dangerous to discount an input which has such a long and storied history of impact on the Aussie. We know the NAB strategy team very well and believe the Co- Head of FX Strategy Ray Attrill to be in the top few Currency Strategists globally so we’ll give them the benefit of the doubt on this call. But certainly the worm is turning for the Aussie and the global economy as noted in the Economic Surprise indices and the copper price we’ve mentioned above. Equally both Reuters and the FT this morning are running what might be called anti commodity currency articles which are worth noting also.

The price action in the Aussie was intriguing yesterday it pushed up above 1.03 for a while but as soon as Europe entered the fray the selling for the Aussie and the Euro started to come under selling pressure. We had targetted a test of 1.0250 yesterday morning so we sold but took our profit a little early as the low was eventually 1.0233 overnight. The Aussie is starting the day right in the middle of last nights range and the outlook from where we sit is for a move back under 1.02 to test support at 1.0180 now although on the day we might see a rally to sell into first.

The Euro remains in its range and traded 1.3014 to 1.3093 overnight and sits around the low 60’s this morning. It either has to break 1.32 or 1.30 to build any decent momentum. GBP is very interesting as well respecting a little uptrend line since the low back in March. The key level to watch is 1.5188 over the next few days – a breach would be ugly but it has to break first.

On commodity markets as noted above Copper was lower falling 0.62% although crude and gold were both higher rising 0.85% and 1.84% respectively. Yesterday afternoon we updated our thoughts on Gold which you can find here. Silver was up 1.59% and on the Ags Corn, Wheat and Soybeans all fell 0.84%, 0.95% and 0.72% respectively.

Data

It is going to be a huge 24 hoursy – Watch our twitter feed for the data as it flows because with so many PMI’s out markets are going to get a really good and up to date read on the economy of the globe.

We kick of with the HSBC Chinese Manufacturing PMI in Asia today before heading to Europe this afternoon/tonight where we see French, German and Eurozone manufacturing PMI’s. Similarly in the US its manufacturing PMI plus housing sales and Richmond fed

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