Thursday, 29 October 2009
The transfer of risk (in the derivatives markets);
International trade (in the currency markets)
– and are used to match those who want capital to those who have it.
Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.
In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process.
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.
Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.
Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.
If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financi market.
Market convention from the early 1980s to 2006 was that most currency pairs were quoted to 4 decimal places for spot transactions and up to 6 decimal places for forward outrights or swaps. (The fourth decimal place is usually referred to as a "pip"). An exception to this was exchange rates with a value of less than 1.000 which were usually quoted to 5 or 6 decimal places. Although there is no fixed rule, exchange rates with a value greater than around 20 were usually quoted to 3 decimal places and currencies with a value greater than 80 were quoted to 2 decimal places. Currencies over 5000 were usually quoted with no decimal places (e.g. the former Turkish Lira). e.g. (GBPOMR : 0.765432 - EURUSD : 1.5877 - GBPBEF : 58.234 - EURJPY : 165.29).
puts money in a savings account at a bank;
contributes to a pension plan;
pays premiums to an insurance company;
invests in government bonds; or
invests in company shares.
More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold.
The following table illustrates where financial markets fit in the relationship between lenders and borrowers
To understand financial markets, let us look at what they are used for, i.e. what is their purpose?
Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages.
In economics, typically, the term market means the aggregate of possible buyers and sellers of a thing and the transactions between them.
The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges.
Financial markets can be domestic or they can be international.
a company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.
a company limited by shares. The most common form of company used for business ventures.
an unlimited liability company. A company where the liability of members for the debts of the company are unlimited. Today these are only seen in rare and unusual circumstances.
There are, however, many specific categories of corporations and other business organizations which may be formed in various countries and jurisdictions throughout the world.
According to one source, "it may be formed by Act of Parliament, by Royal Charter, or by registration under company law (referred to as a limited liability or joint-stock company)."In the United Kingdom, the main regulating laws are the Companies Act 1985 and the Companies Act 2006. Reportedly, "a company registered under this Act has limited liability: its owners (the shareholders) have no financial liability in the event of winding up the affairs of the company, but they might lose the money already invested in it",In the USA, companies are registered in a particular state—Delaware being especially favoured—and become Incorporated (Inc).
In North America, two of the earliest companies were The London Company (also called the Charter of the Virginia Company of London)—a English joint stock company established by royal charter by James I of England on April 10, 1606 with the purpose of establishing colonial settlements in North America—and Plymouth Company that was granted an identical charter as part of the Virginia Company. The London Company was responsible for establishing the Jamestown Settlement, the first permanent English settlement in the present United States in 1607, and in the process of sending additional supplies, inadvertently settled the Somers Isles, alias Bermuda, the oldest-remaining English colony, in 1609.
The basic theory behind all business organizations is that, by combining certain functions within a single entity, a business (usually called a firm by economists) can operate more efficiently, and thereby realize a greater profit. Governments seek to facilitate investment in profitable operations by creating rules that protect investors in a business from being held personally liable for debts incurred by that business, either through mismanagement, or because of wrongful acts.
Wednesday, 28 October 2009
The dollar started to firm overnight as we are seeing profit taking after yesterday’s rally in equities and commodities but has failed to generate consistent support. Markets appear to be taking a breather ahead of the significant event risk to close the week including European interest rate decisions and US non-farm payrolls. Personal spending and income data today could spark volatility as a dearth of consumer consumption is the dark cloud over a potential recovery. An expected 0.2% increases in personal spending will ease some concerns but the forecasted 1.0% decline in personal income will cast doubt on its sustainability. The concerns remain that the mounting job losses will ultimately lead consumers to continue to retrench which would jeopardize future growth once government spending abates. Although we are expecting Friday’s employment report to show job losses easing to 325K from 467K, the unemployment rate is forecasted to rise to 9.6%.
Looking ahead to today, forex traders can expect much of the same volatility in the market. The Dollar is set to move a lot against its major pairs, such as the GBP, EUR, JPY, and CAD. This is likely to occur, as investors continue to trade on much of yesterday's data. Additionally, the U.S. market is set to be the main market mover again with the with the release of Personal Spending and Personal Income data at 12:30 GMT, and the publication of U.S. Pending Home Sales at 14:00 GMT. In order to take advantage of the very volatile forex market, it's advisable that you open your USD positions now.
The first monthly gain in producer prices since July, 2008 will have a major influence over the ECB’s decision on whether to add to their covered bond purchase program. The central bank has maintained that deflation is no longer a concern as they expect that emerging growth and rising energy costs will bring prices back to their target rate of 2.0%. Indeed, energy costs rose 1.4%during the month but still remain 15% lower from a year ago which dragged the annual rate to its record low. The central bank has only exercised 4 billion of its 60 billion purchase program signaling that the bank will refrain from adding to it as it maintains its measured approach. However, Euro-Zone banks continue to tighten lending standards and their deposits remain at elevated levels. The EUR/USD still appears to have potential to reach 1.4613-61.8% Fibo of 1.6037-1.2325
The GBP/USD pair rose by over 250 pips in Monday's trading to the 1.6980 level. This may also have been helped as the USD may have come under increasing pressure from the rise in Oil and other commodity prices. The EUR/USD cross climbed by 190 pips to 1.4421, the highest level since December 2008, just weeks after the collapse of Lehman Brothers. Both the EUR and GBP rose against a string of other currencies, such as the JPY, as demand for higher yielding assets rose, along with risk appetite, as yesterday's trading dragged on.
The key highlights for foreign exchange traders this week will be a barrage of US economic reports, including personal consumption, personal income, pending home sales, durable goods orders and Friday’s key July labor report. The July unemployment rate is expected to climb higher to 9.7% from 9.5% in June. The non-farm payrolls report is seen improving sharply to post a loss of 340k jobs versus 467k jobs shed in June.
At the same time, the bank slashed the minimum reserve requirements ratio on foreign currency commercial deposits to 30% from 35%, effective on August 24.
The Board of the National Bank of Romania also decided to actively use open-market operations in order to ensure an adequate management of liquidity in the banking system.
The week ahead will provide further insight into state of the US economy, providing fodder for equity market bulls and ultimately sending the dollar to fresh lows.
benefiting the yen. In Europe, a report is likely to indicate that producer prices declined at a strong pace, damping demand for the European common currency. Emergent-market currencies like the South African rand, and Commodity-linked currencies like the Australian dollar, posted the sharpest losses versus the yen, as these currencies tend to have a higher volatility due to their riskier profile.
Analysts indicate today’s movement as a correction, and also a pause in the current rally that higher-yielding currencies are imposing versus the yen. A number of traders are selling their positions in emergent-markets to take profits from last week’s rally, but it does not mean that the yen is starting a recovering pattern, the outlook for the Japanese currency still remains very negative.
GBP/JPY traded at 160.29 as of 9:53 after topping at 162.17 hours earlier. EUR/JPY traded at 136.11 from 137.69.
If you want to comment on the Japanese yen’s recent action or have any questions regarding this currency, please, feel free to reply below.
Analysis & Trading Signals4/16/2009Obama's Mortgage Rescue Plan Finally In EffectThe United States Treasury Department announced that the Obama Administration's Mortgage Rescue Plan, designed to help homeowners by modifying their existing mortgage loans, is finally underway.Six major servicers.
The crude oil price rally during the past weeks has been favoring the Canadian dollar massively, since one of the main national exports to the U.S. is the oil, which experiences an increase on its price as demand for energy tends to grow in a recovering economy. Corporate earnings this week in the U.S. and Asia helped high-yielding currencies to gain even further, as the greenback and the yen tumbled to the lowest levels in more than a year. Manufacturing in China figures published yesterday, indicated the highest climb in a year, suggesting that the Asian nation is also being helped by global signs of economic recovery, as a higher demand influences its industrial production.
Analysts state that equities market gains have still a reasonable range to continue, and that the Canadian dollar is very likely to follow these movements. The crude oil may also help the Canadian dollar to climb, and it is not impossible that the loonie will be traded one-to-one versus its U.S. counterpart before the end of the year.
USD/CAD traded at 1.0697 as of 9:13 GMT from a previous rate yesterday of 1.0780.
If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
Analysts consider strongly positive for the Aussie the speculations regarding the national borrowing costs, and that today’s climb for the Australian national currency can be linked not only to the current optimism in the South Pacific region, but also with a negative outlook of some currencies like the low-yielding U.S. dollar and yen, and the currently problematic Great Britain pound.
AUD/USD climbed to 0.8354 from 0.81840 as of 11:41 GMT. AUD/JPY followed, reaching 78.814 from 77.930.
The Canadian dollar reached a 10-month high versus the greenback last Friday as traders are heavily driven by risk appetite, betting in commodities and stocks, consequently affecting positively Canada’s currency, which is strongly linked to crude oil rates, since this commodity is one of the main Canadian exports to the United States and several other countries. A report last week also indicated that the Canadian gross domestic product shrank more than analysts’ expectations, but since the sentiment towards the U.S. dollar is so negative currently, and risk appetite is still on the rise, and the Canadian dollar was barely affected by the report indicating a worrying recession in the country.
Economists analyze the Canadian dollar’s situation as better than other G-8 country members current economic profile and this is a strong factor to keep the loonie’s attractiveness high, even if Canada did not find a way out of recession. Currency strategists affirm that even if the loonie can be considered overpriced for the moment, it is unlikely that is rates will fall due to the strong demand for risk.
USD/CAD closed on Friday at 1.0779 from 1.0855 in the beginning of the week.
If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
The fact that corporate earnings and several reports in the United States came better than what most of economists predicted pushed confidence among traders to return to high-yielding assets intensively. The Australian dollar lost significantly versus the yen two weeks ago, and the current market scenario is the perfect opportunity for traders to profit as the Aussie rebounds.
AUD/JPY climbed to 76.89 as of 11:34 GMT from an opening price of 75.75. AUD/USD followed, being traded at 0.8124 from 0.8055.
The Australian currency, often referred as the Aussie, strengthened to a two-week high versus the yen as stocks in Asia climbed this Monday, raising attractiveness for the yield of the Australian dollar.
The Australian dollar had a brilliant performance last week supported by U.S. corporate earnings, and this week, both the Aussie and its New Zealand counterpart started bullish mainly against the yen and the greenback, as commodity prices continued on the rise, favoring the attractiveness of the South Pacific currencies.the crude oil rise together with several other commodities pushed the Aussie up to hit a two-week hige crude oil rise together with several other commodities pushed the Aussie up to hit a two-week high versus the Japanese yen, which is losing massively since risk aversion declined.
Monday, 26 October 2009
A large portion of the revenue is likely to come from the most financially stretched consumers, according to the paper.
It said the research showed that many banks have increased charges on overdrafts and credit cards in order to boost profits.
The median bank overdraft fee rose this year by one dollar to $26, the paper said, citing the Moebs data.
"Banks are returning to a fee-driven model and overdraft fees are the mother lode," Mike Moebs, the company's founder was quoted by the paper as saying.
Last year the U.S. Federal Reserve approved credit card rules to curb "unfair" practices such as surprise fees and interest rate hikes, and new mortgage lending rules are expected this summer.
It is also mulling rules to give bank customers the chance to opt out of overdraft schemes that can involve fees.
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Forex currency trading is done is pairs and these are known as crosses. These pairs are always against the US dollar and the main crosses you will find when trading forex are the USD/EUR and the USD/GDP. The most popular crosses are known as majors and these can make forex traders great profits. Currencies change on a regular basis and are based on the how the world financial markets see the value of the currencies. You can sell or buy these currencies and forex brokers do not charge commission fees.
Forex trading until recently was reserved for banks and other large financial industries but thanks to the power of the internet and online currency trading, forex has now become feasible for everyday people. The forex market has become the largest trading market in the world and each day there is an estimated turnover of over $1.5 trillion dollars. Another added bonus is available 24 hours a day, 5 days a week unlike most other markets that operate on an 8 hour day. This means that people wishing to trade forex can do so at any given time.
Forex trading is the new way to make money through online currency trading. With a worldwide market and over 60 currencies for you to trade there has never been an easier way to make money online.
With this type of forex dollar exchange, you can purchase currencies from around the world. A common currency change is from the US dollar to the European currency. Yet, other countries, especially developing countries can be even more profitable to invest in to make a profit. It takes a lot of time and study to learn how to invest in this type of market. The forex market is much like the stock market, but instead of trading stocks and bonds for companies, you are trading currencies from countries around the world.
When investing in forex, dollar changes like this should be complete using a high quality piece of software. Many online programs are available to help you learn how to trade with forex as well as to help you make the trades happen. When you use these systems and software products, there is likely to a fee to use them. Yet, for someone that makes a sizable amount of money off the forex dollar exchange, chances are good it is well worth the investment.
Forex dollar exchange is a great way for the investment savvy person to make a sizable return on their investment. Yet, it is one of the most challenging of all methods and therefore needs to be complete with caution.
Although there is a detailed analysis of the fundamental news for this pair on the main euro to dollar site today traders should focus on the German ZEW Sentiment Index, a diffusion index based on a survey of German institutional investors and analysts. In fact the survey asks around 350 German institutional investors and analysts to rate a 6 month eonomic outlook for Germany. It is considered a leading indicator of economic health as the participants are considered highly qualified by virtue of their job, and changes in their sentiment can be an early signal of future economic activity. If the actual is better than forecast then we can expect the Euro to benefit accordingly.
My trading suggestion for today is to wait for the release of the German ZEW and if, as expected, it comes in better than expected to look to profit from an upturn in the Euro.
HPQ – Hewlett-Packard Co. – The global technology company has experienced a more than 1.5% decline in shares today to $43.26 ahead of its third-quarter earnings release, which is scheduled to follow the closing bell on Tuesday afternoon. At least one investor was seen bracing for bad news or at least for continued declines in the price of the underlying. The trader established a ratio put position by purchasing 5,000 puts at the August 42.5 strike for approximately 89 cents apiece, spread against the sale of 10,000 puts at the lower August 40 strike for 25 cents per contract. The net cost of the bearish transaction amounts to 39 cents and yields maximum potential profits of 2.11 if the stock slips to $40.00 by expiration this Friday. Shares must fall about 3% from the current price in order for the trader to begin to amass profits beneath the breakeven point at $42.11. Maximum profits of $1,055,000 will be retained by the investor if the stock falls to $40.00 and the lower strike puts remain out-of-the-money. If shares were to slip lower than $40.00, the trader may have shares of the underlying put to him at expiration given the ratio of 2 short put options to each long contract in his possession. Investor uncertainty has marched steadily higher throughout the day from 33% this morning to the current reading of 37% -- a sign of building tension ahead of the firm’s third-quarter profit report.
ALGN – Align Technology, Inc. – Investors in the maker of the Invisalign system are surely all smiles today as shares have exploded more than 30.5% higher to $13.20. The manufacturer of Invisalign, which is a proprietary method for correcting the misalignment of teeth, has nearly breached its 52-week high of $13.74 on today’s rally. Positive news regarding a settlement over patent litigation involving ALGN and Danaher Corp.’s Ormco unit, prompted one analyst at Northcoast Research to raise the stock to ‘neutral’ from ‘sell’. Bullish traders, hoping for continued gains in the stock, purchased approximately 1,000 calls at the September 15 strike price for an average premium of 23 cents apiece. Shares of ALGN must climb an additional 15% in order for call-buyers to begin to amass profits at the breakeven price of $15.23. Additional near-term optimism was observed at the August 10 strike price where traders shed 1,000 puts for 21 cents each. Other investors appeared to be banking gains on the rally by selling about 2,000 calls at the now in-the-money August 12.5 strike for a premium of about 80 cents. We note that 15,656 option contracts exchanged hands on Align Technology during the trading session, which comprises more than 53% of the existing open interest on the stock of 29,119 lots.
Forex Technical Analysis for the Euro vs Dollar
Yesterday's relatively wide spread down bar on the euro vs dollar chart was significant for two reasons: firstly prices opened gapped down from Friday's close suggesting that the bearish sentiment which is currently evident may have some impetus. Secondly prices closed below the 40 day moving average which would tend to reinforce this view. However, this analysis has to be counterbalanced against the performance the equity markets which although have seen dramatic falls in China and an almost 2.5% fall in the S&P500 has not really translated as strongly as we would have expected into dollar strength but appears simply to expanded the euro vs dollar trading range to between USD1.38 and USD1.43. Whilst this expanded range will provide trading opportunities for swing traders and scalpers, longer term position trading may prove difficult and may have to wait until there is a clear and sustained breakout either side of the current range.
United States – Productivity in Q2 jumped 6.4%, surpassing the consensus estimate of 5.5%. Unit labor costs diminished 5.8% while hourly compensation climbed 0.2%.
The U.S. trade deficit rose from $26.0 billion to $27.0 billion in June, short of the consensus estimate of $28.7 billion. The swell was due to a $3.9-billion increase in the petroleum deficit, driven by higher oil prices. The deficit excluding petroleum retreated from $12.7 billion to $9.8 billion, an 11-year low.
The FOMC kept its target range for the Fed funds rate unchanged this week at 0% to 0.25%. The Fed clarified its plans for the Fed Treasury purchases: Only the $300 billion previously committed will be spent and the program will expire by the end of October. In our opinion, the target range will need to be adjusted upward, possibly by yearend, for the sake of the Fed’s balance sheet.
U.S. retail sales flagged 0.1% in July, for a first setback in three months. However, the underlying trend is not as bad as this might suggest. Sales excluding gas stations and grocery stores, a better indicator of consumer discretionary spending, were actually up 0.2% for a third monthly increase in a row.
U.S. headline CPI was flat in July while core CPI rose 0.1%. Year-over-year headline CPI slipped to -2.1% from - 1.4% while core inflation slowed to 1.5% from 1.7% a month earlier. However, the year-over-year headline CPI has now probably reached its trough: Price momentum has shifted upward, as evidenced by the annualized 6-month rate of change back in positive territory.
The Canadian trade balance registered a slim $55-million deficit in June, down from a $1.0-billion deficit in May. Exports rose $0.7 billion or 2.3%, driven by energy products (+$0.8 billion) and industrial goods and materials (+$0.4 billion). This was partially offset by declines in machinery and equipment and automotive products.
Imports sagged $0.4 billion, owing mostly to machinery and equipment (-$0.5 billion) and industrial goods and materials (-$0.3 billion). In real terms, the trade deficit shrank $0.5 billion to $4.5 billion thanks to an 11% increase in energy exports.
Manufacturing shipments outdid expectations in June with a 1.9% rise, 80% of which was due to the aerospace products sector, where sales rebounded (+61%) from an abnormally low level the previous month. The record surge on the month of 20.5% in the volume of new orders was particularly impressive.
Within our firm, Charles is the major proponent of the Schumpeterian view, and this thinking was apparent in his and Steve's recent ad hoc, A V-Shaped Recovery in Profits. Due to the quick reflexes that new technologies allow, corporates are managing their cash flow better than ever. Rarely ever, for instance, have companies (ex-financials) remained in such strong positions during a recession, which is yet another reason why we believe that capital spending, rather than consumption, will spark the recovery.
Indeed, the scale at which corporates have been able to cut costs and return to profitability, has laid the groundwork for a deflationary boom of epic proportions (which would be a major surprise for those who fear an easy-money inflationary nightmare). Of course, there is a major threat to this deflationary-boom scenario-and that is the increased government intervention we are seeing in most corners of the world. If government intervention manages to kill off return on investment capital, as it did in the 1930s, then the current opportunity will go up in smoke. Regular readers know we tend to err on the side of optimism; at this point we still hold out hope that a major lurch to a big-government era can be resisted-as exemplified, for example, by the unexpectedly strong fight we are seeing against the health-care bill, or the ability of so many US financials to pay back their debt to the US Treasury, thus lowering the extent of government influence on their business decisions. Thus, in our view, a period of deflationary boom is the likeliest scenario, and investors should focus on sectors and countries that will see the largest resurgence in capital spending.
Where did all the economic optimism go? Just a week ago we were celebrating the end of the recession and now we look like we are running for cover. Banks have been failing like crazy yet the Colonial Bank failure late Friday afternoon, on top of sinking consumer confidence and retail sales, was a reminder that while the economy is on the mend we still have some significant problems ahead.
Weak demand for oil and ample supply in storage means that oil is less concerned with the three storms that have developed in the Atlantic. With global spare production capacity at the ready and lessons learned from past hurricanes, the market at this point is less concerned about the hurricane threats than it has been in the past. Of course at the same time these storms may not be a threat to oil production anyway. Ana, Bill and Claudette are the names of these storms. Claudette is a tropical storm that has already hit the Florida coast. The National Hurricane Center says that the center of Claudette was 25 miles west of Panama City, Florida, at 10 p.m. Central Daylight Time, the center said.
The storm was moving northwest at 12 mph with winds of about 50 mph, the latest advisory said.
Claudette has not impacted any oil or gas production in the Gulf.
Ana is a tropical depression whose current track going up the gulf side of the Florida coast whose track theoretically could and may be more of a threat to oil production but that really depends on the strength of the storm which at this time though uncertain seems to be less of a threat. The National Hurricane center says that Ana is moving at an uncertain but fast track. The storm is tightly clustered for the next 36 hours or so and in is expected that Ana will move over Hispaniola. Then the storm’s, “dynamical guidance will weaken and bring the remnants toward the eastern Gulf of Mexico or Florida.” But it is possible that the storm may fizzle out over Hispaniola and not become an issue.
Then there is Hurricane Bill that looks like it will go up the East-Coast and miss the key oil producing Gulf completely. Though the storm could change direction the market seems like it will not become an issue.
So if the storms are not an issue then the economy will be. Stocks are concerned about more bank failures and the fact that Japan’s economy grew less than estimated. Stocks in Asia and Europe fell as the US dropped last week. As far as an important indicator of future energy demand, traders may focus on the Federal Reserve Bank of New York’s Empire State Index. Traders are looking for the first expansion in New York manufacturing in a year and if they do not get it, the energy complex may feel the brunt of the disappointment.
Start your week off right by getting the latest breaking business news on the Fox Business Network where you can see me every day. And it might be time for you to trade! If you are ready call me at 800-935-6487 or email at Pflynn@pfgbest.com. Call for intraday entry and exits! See all the services that PFGBest can offer you. Metals, Forex, managed accounts you name it!
We're short Sept crude from apprx 7150 – lower stop to 7050!
Sell September heating oil 19300 - stop 19700.
Sell September RBOB 20550 –lower stop 20900.
Sell September natural gas at 470 - stop 480.
The blue line presents actual growth in real U.S. GDP in the decade following each point in time. This line ends a decade ago for obvious reasons. The red line presents the 10-year projected growth of "potential" real GDP. This line is much smoother, because the measure of potential GDP is not concerned with fluctuations in economic growth, only the amount of output that the economy is capable of producing at relatively full utilization of resources.
One of the things to notice immediately is that because of demographics and other factors, projected 10-year growth in potential GDP has never been lower. This is not based on credit conditions or other prevailing concerns related to the recent economic downturn. Rather, it is a structural feature of the U.S. economy here, and has important implications for the sort of economic growth we should expect in the decade ahead.
The green line is something of a hybrid of the two data series. Here, I've calculated the 10-year GDP growth that would result if the current level of GDP at any given time was to grow to the level of potential GDP projected for the following decade. This line takes the "output gap" into effect, since a depressed current level of GDP requires greater subsequent growth to achieve future potential GDP. Notice here that even given the decline we saw in GDP last year, the likely growth in GDP over the coming decade is well under 3% annually - a level that we have typically seen in periods of tight capacity (that were predictably followed by sub-par subsequent economic growth), not at the beginning stages of a recovery.
The situation is clearly better than it was at the 2007 economic peak, where probable 10-year economic growth dropped to the lowest level in the recorded data, but again, the likely growth rate is still below 3% annually over the next decade even given the economic slack we observe.
Aside from a gradual recovery of the "output gap" created by the current downturn, there is no structural reason to expect economic growth to be a major driver of investment returns in the years ahead. With valuations now elevated above historical norms, there is no reason to expect strong total returns on an investment basis either.
This week I offer you two short pieces for your Outside the Box Reading Pleasure. The first is from my friends at GaveKal and is part of their daily letter. They address the real difference between those who think we will have a consumer led recovery (Keynesian) and those who think we will have a corporate profit led recovery (classical economics or Schumpeterian). This is actually a very important debate and distinction.
We are hearing concerns, from some clients and friends, that the brutal corporate cost-cutting seen in the wake of the subprime crisis will delay the recovery, because this trend is killing the US consumer. In other words, how can one spend if he has lost his job or fears as much, or has seen his work hours drastically reduced, taken a pay cut, or expects his company pension system is about to implode? For us, this all boils down to a crucial question: do we need consumption to pick up in order to achieve a rebound in growth? The answer to this question very much depends on whether one accepts a Keynesian view of the economic process, or a Schumpeterian (or classical) view. We hope our readers forgive us, but we are now going to have to get a tad theoretical....
The trading range for today is among the key support at 92.10 and the key resistance at 96.85.
The general trend is to the upside as far as 102.60 remains intact with targets at 84.95 and 82.60.
Support : 94.10 93.70 93.15 92.75 92.10
Resistance : 95.10 95.10 96.00 96.85 97.25
Historically, two factors have made important contributions to stock market returns in the years following U.S. recessions. One of these that we review frequently is valuation. Very simply, depressed valuations have historically been predictably followed by above-average total returns over the following 7-10 year period (though not necessarily over very short periods of time), while elevated valuations have been predictably followed by below-average total returns.
Thus, when we look at the dividend yield of the S&P 500 at the end of U.S. recessions since 1940, we find that the average yield has been about 4.25% (the yield at the market's low was invariably even higher).
Presently, the dividend yield on the S&P 500 is about half that, at 2.14%, placing the S&P 500 price/dividend ratio at about double the level that is normally seen at the end of U.S. recessions (even presuming the recession is in fact ending, of which I remain doubtful). At the March low, the yield on the S&P 500 didn't even crack 3.65%. Similarly, the price-to-revenue ratio on the S&P 500 at the end of recessions has been about 40% lower than it is today, and has been lower still at the actual bear market trough. The same is true of valuations in relation to normalized earnings, even though the market looked reasonably cheap in March based on the ratio of the S&P 500 to 2007 peak earnings (which were driven by profit margins about 50% above the historical norm).
Stocks are currently overvalued, which – if the recession is indeed over – makes the present situation an outlier. Unfortunately, since valuations and subsequent returns go hand in hand, the likelihood is that the probable returns over the coming years will also be a disappointingly low outlier. In short, we should not assume, even if the recession is ending, that above average multi-year returns will follow.
That conclusion is also supported by another driver of market returns in the years following U.S. recessions: prospective GDP growth. Every quarter, the U.S. Department of Commerce releases an estimate of what is known as "potential GDP," as well as estimates of future potential GDP for the decade ahead. These estimates are based on the U.S. capital stock, projected labor force growth, population trends, productivity, and other variables. As the Commerce Department notes, potential GDP isn't a ceiling on output, but is instead a measure of maximum sustainable output.
The comparison between actual and potential GDP is frequently referred to as the "output gap." Generally, U.S. recessions have created a significant output gap, as the recent one has done. Combined with demographic factors like strong expected labor force growth, this output gap has resulted in above-average real GDP growth in the years following the recession.
The chart below shows the 10-year growth rates in actual and potential GDP since 1949 (the first year that data are available).
Eyes were on stock markets after Monday's volatile session in which shares in Shanghai .SSEC lost 5.8 percent and currencies associated with risk-trades, such as the Australian and New Zealand dollars, shed more than 1 percent.
The euro, Aussie and kiwi dollars all rose about half a percent against the Japanese currency and clawed back some lost ground against the dollar as investors covered short positions built in the sell-off the previous day, dealers said.
"Gains in yen crosses today were a recovery from excessive losses the previous day, rather than investors being actively engaged in risk trading," said Ayako Sera, a market strategist at Sumitomo Trust & Banking.
The trading range for today is among the key support at 1.3840 and the key resistance at 1.4460.
The general trend is to the downside as far as 1.4720 remains intact with targets at 1.2120.
Support : 1.4070 1.4020 1.3990 1.3965 1.3930
Resistance : 1.4110 1.4185 1.4230 1.4275 1.4315
Recommendation : Based on the charts and explanations above our opinion is selling the pair from 1.4100 To 1.3965 and stop loss above 1.4185, might be appropriate.
Last week ended with a bullish engulfing pattern (daily chart), indicating stregnth to the upside early this week. The start of trading this week has confirmed this as the rate pushes above recent swing highs.
Target on the upside is 95.20 with some resistance expected in the 95 area.
Minor support is expected at 94.65, 94.35 and 94.20-94.15 on corrections.
I want to remind everyone of the Institute of Real Estate Management Annual Trade Show on March 18th. It is held at the Burton Manor on Schoolcraft in Livonia. It is a good place to find vendors that cater to the rental property business. The show is free.
Our meeting this month will be an open format. This is the time to get your questions answered by the other attendees. I want to hear from all as to what worked and didn’t work for you last year, what you learned from last years experiences, what problems you are having now, and what course of action you are taking now. The open format meetings
The pound has traded sharply weaker vs. the Euro - apparently on the continued fall out from the BoE's King and the other two MPC members who also voted for an even large expansion in the asset purchase program. 0.8700 is a critical level in EURGBP. GBPUSD, meanwhile, remains tied up in a tight range.
USDCAD is punching through to new lows today on the strong (if ancient....) retail sales data from June and more importantly the general risk appetite picture and strong rise in oil prices, which are now challenging the highs for the year around 75 dollars a barrel.
Some minor support and resistance levels have developed. A break of those levels is likely to set the tone for the day.
A rise above 1.4360, especially if confirmed by a push above 1.4375, indicates a further move higher. Resistance is expected near 1.4400, 1.4440-1.4450, and by 1.4530.
A drop below 1.4320 will gravitate towards 1.4300. If it holds up well, expect movement back towards 1.4360. Support beyond 1.4300 is 1.4280-1.4270, 1.4200 and 1.4160.
- Final Q2 GDP figures from Germany - no change expected to 0.3% QoQ initial reading. Positive growth, but still down over -7% YoY
- Switzerland SNB's Hildebrand and Jordan to speak
- US Jun. CaseShiller/S&P500 House Price Index - the data is a bit old for this survey...signs are that prices are stabilizing, but delinquencies are still rising and 30% or more of mortgage holders are under water (owe more than their houses are worth). Any talk of a real housing recovery is impossible.
- US Aug. Consumer Confidence - one of the real indicators that suggest stock markets should tread carefully. Confidence is still very low - and the average consumer still has a lot of deleveraging to do.
- US Weekly ABC Consumer Confidence - the most leading of the confidence surveys, though it garners less attention than it should
- Germany Aug. IFO - much like the US confidence numbers, this important survey, which normally correlates well with the equity indices, has failed to rally anywhere near as much as risk appetite in general, suggesting a disconnect in the real state of expectations and the "supposed" state as expressed in the stock market.
- US Jul. Durable Goods Orders - a volatile figure, this one has recovered fully after near record breaking weakness during the fall/winter meltdown. The year on year comparisons remind us where we came from however: ex transportation durable goods ran at a -22.2% clip for the June numbers.
- US Jul. New Home Sales - the disparity between the weak recovery in New Home Sales and the strong bounce in Existing home sales shows that activity in existing home sales has a lot to do with bargain prices and distressed sales and the fed tax credit for first time buyers that expires December 1. New Home Sales are a better indicator of the state of housing.
- US Crude Oil and Product Supplies - this has become a more interesting number than usual after last week's enormous drop in inventories and with crude oil trading close to the highs for the year. Supplies are still plentiful relative to historic norms.
- New Zealand Jul. Trade Balance - the high-flying kiwi is the country's worst enemy with its reliance on commodity exports, especially with still relatively depressed commodity prices
- Germany Aug. CPI - no signs of inflation just yet...ECB also more cautious than in cycles past on the prospects for recovery
- US Q2 GDP - 2nd revision. The US Q2 GDP looked much better - but a lot of that improvement was driven by anemic consumption that brought down import levels. Is reduced trade due to reduced consumption a sustainable path to GDP growth, we ask rhetorically...
- US Weekly Initial Jobless Claims - last week a disappointment. Another disappointing reading is certainly cause for concern for the bulls, but as we have said - wait till late September to get more significance form these weekly figures.
UK Aug. GfK Consumer Confidence Survey - UK Confidence has bounced about halfway back to where it came from before the crisis.
- Japan Jul. Jobless Rate, CPI, Household Spending - the big Friday batch of data that arrives in the last week of every month. Markets more interested in upcoming Aug. 30 election and the direction in risk appetite - particularly in the long bond.
- UK Q2 GDP - 2nd estimate
- EuroZone Aug. Confidence Data
Canada Q2 Current Account
- US Jul. Personal Income/Spending - spending levels are back to unchanged on a month-to-month basis, the moving average in incomes is of more concern - especially with so few still working...
- US Jul. PCE deflator/core - the core price index is a few tenths of a percent from 50 year lows - are we headed there?
- US Aug. Final University of Michigan Confidence - the ugly initial reading touched off a brief swoon in risk appetite before it recovered. Confidence matters! President Obama's approval ratings are also weakening, though that could be a symptom of the highly controversial healthcare reform issue.
After rising more than 3 per cent Monday, the key Nikkei 225 dipped 82.86 points, or 0.78 per cent, to 10,498.19 The broader-based Topix index was also down 5.02 points, or 0.52 per cent, to 965.25.
at 9 am (0000 GMT), the dollar traded at 94.39-44 yen, down from Monday's 5 pm quote of 94.95-98 yen.
The risk-seekers wheeled out fresh funds to plow into the market on Friday, with rather predictable results across markets: stocks and commodities up and bonds down. This translated to USD and JPY falling in the currency market, and the commodity currencies, Scandies and Euro catching a bid. While the response is no surprise, it is perhaps worth noting that the response in the USD is weaker than it has been in the past. For example, the S&P500 peaked at around 90 in early June, when EURUSD peaked out around 1.4335. Now we've seen a spectacular 19% rally from the July trough to current levels over 1025 and the EURUSD is trading at about the same level. The more risk-loving AUD has been a stronger performer, but is still up less than 2% above it's June high despite the massive rally in stocks. For Aussie, it is clear that an interruption in the former Chinese equity market parabola on all of the troubling rumblings about a potential Chinese asset bubble and the authorities attempts to deal with it, have dampened enthusiasm somewhat. Still, the bulls are still trying to bid the currency up for new highs versus the market since the mid-August peak and possibly challenge the pivotal 0.8500/20 area.
This week's economic calendar is relatively light. The highlights this week include the US confidence numbers on Tuesday and Friday and the German IFO on Wednesday. Here's a brief run-down of the salient events for the rest of the week:
The increase in the early trade is due to the heavy buying by funds, driven by a firming trend in the global markets.
The main TAIEX index opened sharply higher and extended its gains all the way to close at 6,838.25, up 183.45 points, or 2.76 per cent from Friday's trade.
Dealers said prospects of US economic recovery ignited strong buying in the US and the European markets Friday, encouraging Asian stocks to open higher on Monday.
The 30-share composite index of the Philippine Stock Exchange gained 139 points to close at 2,859.18, from Thursday's finish of 2,720.18. The market was closed last Friday due to a public holiday.
A total of 2.44 billion shares worth 4.21 billion pesos (87.71 million dollars) were traded.
Gainers swamped losers 97 to 18, while 46 issues were unchanged.
The ASX 200 added 135 points, or 3.1 per cent, to 4,426.
"We've certainly had a very good lead in," CommSec economist Craig James said. "Certainly the analysts had been much too gloomy, and the companies have been very aggressive in terms of cutting costs and supporting the bottom line."
The Nikkei soared 3.12 per cent, or 319.13 points to 10,557.33 during morning trading.
The broader-based Topix index was also up 23.5 points, or 2.48 per cent, at 970.84.
On currency markets at 9 am (0000 GMT), the dollar traded at 94.57-62 yen, up from Friday's 5 pm quote of 93.90-93 yen.
BHEL : (2301) Buy with a stop loss of 2248 for a target of 2375
its highest level of the year and the Standard and Poor's 500 Index reached its highest point since October.
Home resales surged an unexpected 7.2 per cent in July according to the National Association of Realtors, the best monthly gain in 10 years and a sign that the housing crisis which kicked off the wider recession is ending.
European Shares traded higher on Friday and managed their highest close since early November. Investor sentiment was lifted by better-than expected U.S. July existing homes sales. The major gainers were the banking stocks.
The closing of the FTSEurofirst 300 index of top European shares came at 2.3 percent at 966.87 points. It should be noted that index apart from being up about 16 percent for the year, has hiked almost 50 percent since reaching a lifetime low in early March.
Movers & Shakers
The BSE auto index surged 2.6 %. Maruti, M&M and Hero Honda Motors were the top gainers, up over 3.9 % each.
The benchmark Nikkei 225 Stock Average declined 133.1 points, or 1.28 per cent, to 10,250.31.
Automotive shares were among those titles that lost most ground, also affected by the early end of the US "cash for clunkers" car trade-in programme announced for August 24.
Sunday, 18 October 2009
USDAED 3.6731 0.0001 0.0027 3.673 3.6731 3.6727 3.6731 Mon, Apr 20 2009, 07:30 GMT
USDARS 3.674 -0.006 -0.163 3.68 3.68 3.674 3.674 Mon, Apr 20 2009, 07:30 GMT
USDBRL 2.1935 0 0 2.1935 2.1935 2.177 2.1935 Mon, Apr 20 2009, 07:30 GMT
USDCLP 576.8 -2.7 -0.4659 579.5 579.5 576.8 576.8 Mon, Apr 20 2009, 03:18 GMT
USDCNY 6.8334 -0.0001 -0.0015 6.8335 6.8353 6.8284 6.8334 Mon, Apr 20 2009, 07:32 GMT
USDCZK 20.696 0.183 0.8921 20.513 20.76 20.47 20.696 Mon, Apr 20 2009, 07:36 GMT
USDEGP 5.6335 0 0 5.6345 5.6345 5.632 5.6335 Mon, Apr 20 2009, 06:37 GMT
USDHKD 7.7501 0.0001 0.0013 7.75 7.7506 7.7465 7.7501 Mon, Apr 20 2009, 07:34 GMT
USDHUF 228.22 1.67 0.7371 226.53 229.67 226.15 228.22 Mon, Apr 20 2009, 07:36 GMT
USDIDR 10690 -60 -0.5581 10750 10750 10690 10690 Mon, Apr 20 2009, 03:15 GMT
USDILS 4.1992 0.0372 0.8938 4.1617 4.2063 4.1582 4.1992 Mon, Apr 20 2009, 07:35 GMT
USDINR 49.965 0.185 0.3716 49.86 50.1 49.52 49.965 Mon, Apr 20 2009, 07:36 GMT
USDIRR 9978 0 0 9978 9978 9975 9978 Mon, Apr 20 2009, 07:30 GMT
USDISK 128.24 1.41 1.1117 128.24 128.24 128.24 128.24 Fri, Apr 17 2009, 11:03 GMT
USDJOD 0.708 0.001 0.1414 0.707 0.709 0.7041 0.708 Mon, Apr 20 2009, 07:30 GMT
USDKRW 1335 7.9 0.5953 1320 1347.5 1320 1335 Mon, Apr 20 2009, 07:20 GMT
USDKWD 0.29165 -0.00032 -0.1096 0.29174 0.29232 0.29125 0.29165 Mon, Apr 20 2009, 07:30 GMT
USDMXN 13.1592 0.0306 0.2331 13.09 13.1666 13.09 13.1592 Mon, Apr 20 2009, 07:23 GMT
USDMYR 3.6305 0.014 0.3871 3.6205 3.6405 3.618 3.6305 Mon, Apr 20 2009, 07:33 GMT
USDPHP 48.07 0.41 0.8603 47.65 48.15 47.65 48.07 Mon, Apr 20 2009, 07:35 GMT
USDPKR 80.53 0.62 0.7759 80.4 80.56 79.98 80.53 Mon, Apr 20 2009, 07:20 GMT
USDPLN 3.3429 0.0456 1.3829 3.297 3.356 3.2962 3.3429 Mon, Apr 20 2009, 07:36 GMT
USDRUB 33.542 0.092 0.275 33.37 33.5552 33.37 33.542 Mon, Apr 20 2009, 07:30 GMT
USDSAR 3.75 -0.0002 -0.0053 3.7503 3.7504 3.74 3.75 Mon, Apr 20 2009, 07:36 GMT
USDSGD 1.5074 0.0068 0.4532 1.5006 1.509 1.5002 1.5074 Mon, Apr 20 2009, 07:36 GMT
USDTHB 35.54 0.1 0.2822 35.45 35.66 35.34 35.54 Mon, Apr 20 2009, 07:35 GMT
USDTRY 1.6175 0.0007 0.0433 1.6168 1.622 1.6066 1.6175 Mon, Apr 20 2009, 07:36 GMT
USDTWD 33.834 0.024 0.071 33.76 33.897 33.722 33.834 Mon, Apr 20 2009, 07:33 GMT
USDZAR 9.0088 0.0533 0.5952 8.9302 9.0423 8.9165 9.0088 Mon, Apr 20 2009, 07:36 GMT
Solution by InteractiveData Data Source: InteractiveData
The yen rose against all major currencies, while the dollar advanced against the high-yielders only (remaining stable against the British pound, which is no longer a risk currency). While the corporate reports in U.S. help some of their stocks to grow, the world is more skeptical about the growth with the Singapore and China expected to report economy cooldown.
The analysts say that the only real economy improvement currently happening is the U.S. housing sector recovering and the trade balance deficit decreasing. Other economies are yet to report declines in almost all sectors. Those reports will spur further yen’s growth, which may be accompanied by the U.S. dollar rising against some currencies.
EUR/JPY fell from 133.75 to 132.29 as of 9:46 GMT today. USD/JPY declined from 100.07 to 99.42, while GBP/JPY went down from 148.57 to 148.11 today.
After the bullish rally which occurred during the past few days, analysts said that a correction process for the AUD and NZD could be expected, mainly taking into consideration the weakened U.S. retail sales data. Being the news from U.S. not the only factor that forced the Aussie and the kiwi down, commodity prices also showed a fall, creating all the necessary conditions for profiting with the major currencies traded with the AUD and NZD.
The AUD/USD traded at 0.7199, falling more than 80 pips in the intraday comparison. The NZD fell even more against the USD, being the pair traded at 0.5782 from yesterday’s level of 0.5880. The NZD/JPY was traded at 57.29, a significant decline from 58.65.
For a period of more than 3 years, the euro remained in advantage against the pound in the currency options market. This tendency has been reversed, as traders are now paying 0.25 percentage-point for one-week call options on the pound if compared to puts. Call options are those where traders have the right to buy an asset, while put options oppositely, give the right to sell assets. The turning point in the EUR/GBP market occurred on April 3, and, since April 6, the market favored the pound in every day but one.
In the intraday chart comparison, the USD/JPY was traded at 99.25 from 98.45. The EUR/JPY was traded at 131.05 from 130.45. The same movement was perceived with the NZD/JPY, rising from 56.95 to 57.55.
The GBP/USD was traded at 1.4935 from 1.4873. In the European markets the EUR/GBP was traded at 0.8815 falling from 0.8875.