Intraday Market Thoughts

Desperate Measures from Everywhere, Sentiment at 30-year lows

by Adam Button
Aug 13, 2011 20:10

In a week when the Federal Reserve promised near zero rates for at least 2 more years, the ECB vowed to buy Italian & Spanish bonds and for more Eurozone nations to announce bans on short selling, signs of desperation are already here. Markets decided to acknowledge all of that by closing +0.5% on Friday. But the summer is not yet over. Meanwhile, US consumer sentiment hit 30-year lows, leading to that all-too-familiar question from 2007 "are we already in a recession?" More on CFTC Data, USDCHF & CAD. By

US consumer sentiment fell to the lowest level in more than 30 years, highlighting the growing recession risk. CHF lagged badly once again while GBP was modestly stronger than the rest of the G10 pack. Fridays CFTC report showed USD shorts cut down by more than 50%.

The S&P 500 closed up 0.5% to 1179 and traded in a 20 point range, which was a reprieve from the 60-80 ranges from the rest of the week. Moves in FX were less than 50 pips against the USD with the exception of CHF, which continues to fall on threats from the Swiss National Bank.

US retail sales (ex auto and gas) increased 0.3% compared to the +0.1% expected. The modest beat is good news but sales are still much slower than they should be at this stage of the recovery.

The more important economic news, from our perspective, was the fall in the UMich consumer sentiment survey to 54.9 from 63.7 (exp 62.0) -- the lowest since May 1980. The survey took place BEFORE the US was downgraded and stocks swooned but amidst the doom and gloom of the debt ceiling debate.

Pollyanna economists responded to the numbers by saying consumers are saying and doing different things but thats not the case at all. Retail sales are backward looking; consumer sentiment tells you what consumers WILL DO IN THE FUTURE.

Here is what we wrote on July 16 (; when sentiment fell to 63.8 compared to the 72.5 expected. It equally applies to Fridays report:

We dont think markets fully appreciated the potential ramifications of such a low number, perhaps due to summer doldrums or its late-week release. This is historically a telltale indicator of consumer spending and the economic outlook. Its also among the best early warning signs of trouble. We arent overly alarmed because its only one number but unless its revised significantly higher and we start to see improvement in August, this is the first evidence of a potential double dip. Whenever the survey has been this low in the past, the US has been in a recession.

A week later the S&P 500 peaked at 1346 before falling nearly 250 points. Risk FX trades (like AUD, CAD and NZD) followed a similar trajectory.

Looking At The Weekly Charts

Last Friday, the lone weekly chart we discussed was AUD/USD, noting the negative weekly reversal. The pair fell by as much as 500 pips on Monday and Tuesday. The reversal late this week (despite negative economic news from the jobs report), and a hammer on the weekly chart suggest the fall is done for now and we should see the pair consolidate higher.

- USD/CAD fell 40 pips in the last 20 minutes of weekly trading to close slightly below the resistance at 0.9913; CAD still looks significantly weaker than AUD.

- We pointed out the potential bottom in USD/CHF yesterday but there is no such signal in USD/JPY.


The overall USD short position fell to the smallest level since January as negative bets on the dollar were cut by more than half. Despite that, USD remains in negative territory on all crosses except versus EUR which fell to a net short 8.3K contracts. The AUD long position was cut by more than 60% to +30K net long. There were large drops in JPY, CAD and CHF longs; open interest tumbled.


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