Intraday Market Thoughts Archives

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 (http://ashraflaidi.com/forex-news/?a=2541); 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.

CFTC Data

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.

Those comments from the Swiss National Bank are merely a sophisticated form of verbal currency intervention(beats the usual empty threats of vowing to intervene) designed to catch traders wrong-footed with an original idea-- yet far from practical. Why would a neutral economic powerhouse link its currency to an overstretched single currency, whose central bank is rushing to . . .

central bank is rushing to . . . buy at least EUR 100 bln in additional dubious sovereign debt and whose nations lack unified fiscal policies? The advantages of a more competitive currency are always desired by a thriving exports industry such as Switzerland-- but NOT at the expense of aligning its monetary policy (that's what SNB will have to do if it were to peg CHF to EUR) to an external central bank that is barely exercising control over disparate set of economies. The SNB has succeeded in buying itself some time by triggering a 600-pt decline in the currency, just as the Fed has bought itself some time by making a reference to the "2013" definition of extended period before it assesses when will it start QE3. All central banks do it--buying time--and that's exactly what the desperate SNB did when all threats have failed.

Thus, instead of a peg, the SNB may well consider capital controls to limit foreign inflows into the country, as was done in the 1970s, and as is currently being done by hot-money emerging markets of Latin America.

Ashraf Laidi

Europe uncertainty continues as Merkel and Sarkozy arrange to meet next week, French GDP expected to slip, Japanese industrial production, Italian trade balance to widen as Italy argues about austerity, US retail sales, gold rebounds after margin hike. Friday's 10 Premium trades have seen all limits hit in our S&P Mini & Dow-20 futures. EURUSD, GBPUSD positions are in the green.

The uncertainty surrounding the situation in Europe looks set to continue into next week after German Chancellor Angela Merkel and French President Nicolas Sarkozy arranged to meet to discuss the current crisis on Tuesday. In the meantime Sarkozy has ordered his ministers to come up with new spending cuts in the next week.

Today's release of Q2 French GDP numbers showed the growth was unchanged from Q1 instead of expected 0.3% from 0.9% in Q1.

In a separate measure individual EU regulators agree to ban short selling in another desperate move to contain the volatility in markets this week.

Our Friday Premium trades (posted 5 hrs ago) include 10 new intermarket plays with GBPUSD finally added to the mix. Click here to go straight to our 3 intermarket charts & 10 trades http://ashraflaidi.com/products/sub01/access/?a=474 Non-members can join here: http://ashraflaidi.com/products/sub01/

Italy is facing similar problems in having to agree new austerity measures in return for ECB bond buying so that their bond yields return to more sustainable levels. The 10 year yield continues to remain stubbornly above the 5% level. Italys trade deficit numbers for July is expected to increase to 2.5bn, while unions and the governments coalition partners express unease at the loss of control in the countrys fiscal affairs, in exchange for ECB assistance.

Yesterdays US trade deficit number was a shocker, widening to $53.1bn well outside expectations of $48bn. This continues to show that despite a weakening US dollar the balance between imports and exports continues to widen, suggesting a further downward revision of Q2 GDP. Weekly jobless on the other hand came in better than expected at 395k and the market chose to focus on that and with that in mind it is hoped that US retail sales for July will also surprise in a positive manner.

Gold slumped the most in seven weeks after the CME hiked margins by 22%, sliding back from a new all time high of $1.815, before rebounding from $1,733. While further declines may be possible, longer term gains look likely given the uncertain outlook in both the US and Europe.

Our Friday Premium trades include 10 new intermarket plays with GBPUSD finally added to the mix. Trades on EURUSD (2 trades), EURGBP, GBPJPY, S&P 500, Dow-30, Gold, Silver & US Crude are joined by 3 intermarket charts. On the US calendar, July retail sales are expected to have improved to +0.5% from +0.1%, but sales ex autos (and gasoline) are seen remaining once again rising +0.2%. Would the preliminary Univ of Michigan consumer sentiment disappoint and drop below 62.5 from prev 63.7? Awaiting market further reaction to thd short selling bans in Europe. Click here to go straight to our 3 intermarket charts & 10 trades http://ashraflaidi.com/products/sub01/access/?a=474 Non-members can join here: http://ashraflaidi.com/products/sub01/

The Swiss franc tumbled on the threat of a peg to the euro on Thursday. The risk trade was back on with stocks shooting higher; commodity currencies led while CHF lagged badly. The SNBs sent franc traders into a frenzy when he said a temporary peg to the euro could not be ruled out. Japanese industrial production is coming up Asian trading.

Sentiment jumped on the announcement of short-selling bans in Belgium, France, Italy and Spain that will begin on Friday. US initial jobless claims added to the improved outlook as they fell to a four-month low of 395K from 402K.

The S&P 500 gained 4.6% to close at 1172, in the fourth-consecutive 4% move. That closing level matched the highs from the prior two sessions, leaving the market in a technical stalemate. Gold fell $28 to $1756 after touching a record $1817. Silver outperformed and closed at $38.96.

Given the moves elsewhere, forex was relatively quiet. EUR/USD was virtually unchanged on the day and the majors moved within normal ranges.

The one large exception was CHF as it posted its biggest one-day gain since 1999. The SNB's Jordan sent franc traders into a frenzy when he said a temporary peg to the euro could not be ruled out. There was also speculation of the SNB introducing negative interest rates. Earlier in the month, SNB leader Hildebrand said a fixed and permanent peg isn't compatible with the legal mandate of the central bank.

We see virtually no chance of the SNB attempting a peg unless EUR/CHF falls below parity. The technical, financial and legal challenges of a peg are immense. That doesnt mean the SNB will not use some other method to devalue CHF.

What is more interesting is that it looks possible the CHF may have topped out. Long-term, one-sided moves in markets often end in a similar way with a spike bottom/top. And that's exactly what appears to be playing out on CHF charts.

Other economic news on Thursday was a negative for the North American block. The US trade deficit fell to 53 billion from 50.9 billion and was worse than the $47.5 expected. Canada's trade deficit was also larger than expected at $1.6B vs $0.9B expected. The US had an extraordinarily weak 30-year Treasury auction, selling at 10 basis points higher than the market was expecting.

Asia-Pacific Preview

The lone data point of note on the calendar is Japanese industrial production at 0430 GMT. It is expected up 3.9% m/m in July after an identical rise in June. At the moment, economic news is generally being pushed aside as sentiment, rumours and central bank talk dominates. It would take a miss of more than 1 full percentage point to get the market interested. The bond auction and rising yields might have more of an impact in Asian trading as they help to boost USD/JPY.

Ashraf takes you cycle-by-cycle into the Big Kahuna of FX Chartsthe EURUSD monthly chart--outlining cyclical analysis in light of central bank policies, stochastics and inflection points. Here is Ashrafs Video Charts presentation on Cantos. Ashraf also walks you through . . .

Ashraf also walks you through 1-MONTH VOLATILITY CHART, explaining its implications for the spot rate.

http://www.cantos.com/charts/project/8514/company/Intermarket%20Strategy/term/Analysis

bit.ly/pStjiM

Aussie set for further losses as unemployment rises, focus remains on Euro as French banks give reason for concern, sterling under pressure over growth fears, while gold continues to surge despite 22% hike in margin requirements. Ashraf's Premium analysis correctly predicted that Aussie payrolls would disappoint (see technical rationale & FX implications in last night's piece) below.

The Australian dollar's recent slump has been noticeable not only for its speed but a little surprising given its usually positive link to gold. However the slump in equities and copper prices is feeding into a downward spiral as normal risk currencies get caught up in the equity market sell-off.

This mornings Australian unemployment data for July could well feed into this unwind in long Australian dollar positions, after seeing full-time employment drop 22.2k in July, undoing half of June's jump, while unemployment increased from 4.9% to 5.1%. This disappointing employment report suggests that any move in interest rates is not likely to be higher, but lower in the short to medium term.

See Ashraf's Pre-Report Analysis & Aussie trades. http://ashraflaidi.com/products/sub01/access/?a=473 To Join, click here;http://ashraflaidi.com/products/sub01/

EUR continues to remain in focus after the speculation surrounding Frances triple A rating as well as the health of the French banking sector. The European Central Bank continues to buy Spanish and Italian bonds pushing the 10 year yields lower, but still remaining stubbornly above 5%. The fact is the ECB will have to buy an awful lot more bonds to push yields to a more sustainable level, and there is no guarantee that Italy will be able to implement the austerity measures required, given unease among union leaders at what they see as the abandonment of Italys fiscal sovereignty. Italian finance minister Tremonti is also expected to unveil a new austerity budget in the face of some opposition from unions.

GBP slipped back over fears about the outlook for Q3 growth in the wake of yesterdays inflation report and the after-effects this week s riots will have on the UK economy. If economists were concerned about the effect the Royal Wedding had on the growth outlook in Q2, what they will make of this weeks events is anyones guess.

Gold prices have continued their upward march hitting new all time highs against not only the US dollar but also the euro and the pound, touching $1,800.

In the US later today July trade balance numbers are due out as are weekly jobless claims and it is unlikely that they will surprise sufficiently enough to change overall sentiment unduly

Consensus forecasts expect the July Aussie (21:30 EST, 1:30 GMT) to show +10K from +23K with the unemp rate remaining unchanged at 4.9%.

But looking at the monthly payrolls chart, we notice that the last 8 months of have shown consistent ups-and-downs, with +23K, -0.5K, -28.3K, +47.5K, -10K, +13K, -1K, +52K in the 8 months leading to June. Premium Subscribers find the technical implications for the data and suggested trades in the event of a strong/weak jobs report. Members click here:

http://ashraflaidi.com/products/sub01/access/?a=473 NON-members can subscribe here: http://ashraflaidi.com/products/sub01/

Rumours about banks and sovereign ratings set off another market plunge on Wednesday. NZD, AUD and CAD lagged, USD and JPY were far out ahead of the rest of the market and gold touched above $1800. We examine all the rumours and discuss the safe havens that continue to work no matter the market conditions. All 8 trades of Ashraf's Premium Intermarket Insights hit their targets. See link below.

The absence of economic news on Wednesday will filled by a proliferation of rumours. The result was another massive plunge in stocks with the corresponding falls in risk FX. The S&P 500 fell 4.4% to 1120.

Ashraf helped Premium members navigate the markets perfectly today as ALL EIGHT OF HIS TRADES MET ALL TARGETS. To sign up visit: http://ashraflaidi.com/products/sub01/

The UKs Daily Mail and Zerohedge set off a viscous wave of speculation about the demise of SocGen that was further fueled by the Twitterverse. The Daily Mail later apologized and said their report was not true. Reuters also debunked a rumour that SocGen leaders met with French PM Sarkozy this morning.

Bank rumours are a despicable thing to trade around; first, because Lehman, Bear Stearns and the rest are still fresh in everyones mind; second, because its impossible for banks to prove the rumours are false and; third, because if the rumour proves to be true it is already far too late to avoid trading losses.

The rumour morphed into an imminent downgrade of France, which all the ratings agencies quickly shot down.

Bank of America was also in the crosshairs on reports its trying to raise capital. This rumour appears to have some legs as Reuters reported late in the day that the company is in discussions to raise $17 billion with the sale of a Chinese unit. It now appears somewhat likely that Bank of America rumours will persist in the days ahead.

A volatile market is fertile ground for rumour-mongering. When markets get volatile, fundamentals ALWAYS take a backseat to speculation and sentiment. Its one of the reasons that volatility almost always precedes declines in risk assets.

The one shelter in the latest market rout has been precious metals. Gold touched $1800 today and closed up $50 to $1786 the fourth largest one-day gain ever. Silver gained 4.7% to $39.50. Remember that this happened today amidst a rallying USD; the gains against other currencies were even more impressive.

Here is Ashraf's Video charts presentation making the case against GBP via EURGBP and GBPJPY for Cantos Charts. CLICK HERE: bit.ly/oCnqp5 OR http://www.cantos.com/charts/project/8509/company/Intermarket%20Strategy/term/Cantos+Charts The presentation was made on Monday but aired this morning ahead of the BoE Inflation Report. Premium susbcribers had access to the charts 1 day before the presentation was aired. Meanwhile, 6 of our 7 Premium trades hit their targets today. Here is direct access http://ashraflaidi.com/products/sub01/access/?a=472

Ashraf Laidi

Bank of England inflation report expected to downgrade UK growth, German CPI could drop back on commodity price falls, Splits on FOMC as policy remains loose as US dollar hits new all time lows against Swiss franc, Chinese imports and exports rise more than expected as trade balance widens. See Ashraf's latest premium trades on GBP & more in the link below. Ashraf will be ON CNBC Europe at 9:40 GMT, 10:40 GMT.

Sterling has fallen quite significantly in the last 24 hours after fears grow that UK growth for Q3 is about to hit stall speed and go into reverse after yesterdays economic data. June industrial production came in flat, below expectations of 0.4%, while manufacturing production slumped 0.4%, below expectations of a gain of 0.2%.

With June trade data also disappointing there are increasing concerns that George Osborne could well miss his fiscal targets for 2011. This weeks rioting in London will also add to fears that Q3 GDP growth could well disappoint as business sentiment suffers while tourists could also stay away. This will continue to play into the hands of the doves on the committee, and Adam Posen especially, who has been calling for further stimulus to the economy for some time now.

Todays Bank of England inflation report is unlikely to improve sentiment with the Bank of England expected to downgrade its 2011 growth forecast, though it appears unlikely that the inflation outlook will change given recent declines in commodity prices.

Despite speculation about further QE it is unlikely to happen in the near term due to the current levels of inflation in the economy, and further sterling weakness which further QE would bring, would only make matters worse by importing further inflation, by way of a weaker pound.

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On the other hand Europes much tighter fiscal policy is expected to see German July CPI remain under control, unchanged at 2.4%, held back by recent falls in oil prices. The recent actions of the ECB in buying Spanish and Italian bonds has seen yields fall and thus underpinning the euro, especially against the US dollar where once again monetary policy remained unchanged.

Yesterdays FOMC meeting saw US policymakers change the language of their statement from extended period to rates will remain low until mid 2013, a policy change that was opposed by three members of the committee. Even so the US dollar sank even further, particularly against the Swiss franc sinking to fresh all time lows.

In signs that the Chinese economy remains in pretty good shape, and external demand remains strong, the July trade balance widened from $27.5bn to $31.5bn, with imports rising more than expected to 22.9% from 19.3% while exports also rose 20.4% from 17.9%. This indicates that despite concern about the global economy and falling demand in the western world, elsewhere demand remains fairly robust.

Gold continues to rise exponentially as safe haven flows drive the yellow metal to new record highs against the US dollar, euro and pound in the last 24 hours.

Keeping rates at exceptionally low levels for at least 2 additional years shall remain among the reasons to the exceptionally strong rally in metals, as these are powered by the substitution effect from interest-bearing money. With money hardly compensating investors for the time value of money, gold and silver are now compensating via their appreciation.It is premature to claim a downward spiral of the US dollar against the euro, British pound, as these economies will likely go into their own version of additional central bank stimulus. In fact, we expect fresh damage for the British pound today.

Our Wednesday Premium trades are now ready; http://tinyurl.com/3woxvkv

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Ashraf Laidi

When the Fed didnt save the market on Tuesday, the market decided to save itself. Risk assets initially fell after the Fed downgraded the economy and pledged to hold rates low until mid-2013 but the trade reversed in spectacular fashion. We explain the rally and explain why China is likely done hiking rates.

Its clear that the US government is now on the sidelines, so the sharp fall in stocks in the past two weeks put tremendous pressure on the Fed to do something to stimulate the economy at Tuesdays FOMC meeting. The knee jerk reaction was to sell risk when the Fed only offered minimal stimulus in the form of a pledge to keep rates low until at least through mid-2013.

USD/CHF fell by as much as 5.6% to a low of 0.7066. The S&P 500 fell to 1101. The market then pulled an amazing turnaround as USD/CHF rebounded to 0.7236 and the S&P 500 to 1171. Other risk assets followed a similar pattern.

Two reasons for the market rebound:

1) Lack of alternatives

Traders were upset when the Fed failed to deliver but where else is there to go? Ten-year Treasury yields touched a record low of 2.03%. Dividends on 22 of the 30 stocks in the Dow yield more than 10 years and the average yield is 3.26%. The market tried to bully the Fed into QE3. The Fed didnt bite so the market took a second look at where it could stash its money and decided risk assets were still a good bet.

2) The Fed hinted at more possible action.

The Fed did not deliver the QE3 silver bullet but the statement noted that the FOMC discussed the range of policy tools available to promote a stronger economic recovery and is prepared to employ these tools. Its a reminder that the Fed is creative and powerful.

In the upcoming Premium Piece, Ashraf will offer NEW TRADES and note that both the S&P500 and Dow-30 avoided technical panic as they closed above their respective 200-week moving averages of 1155 and 10740 respectively after both indices sank below these levels intraday. Had they closed below these their 200 WMAs, it would have been the first such decline in exactly 3 years (since August 2008). The last time before that happened was in 2002.

China Likely Done Hiking

Chinese data yesterday on CPI was at touch high but industrial production (14.0% vs 15.1% prior) and retail sales (17.2% vs. 17.7% prior) were soft. Even with higher inflation PBOC has likely come to the end of the rate hiking cycle. Since Oct. 2010, there have been nine hikes in the reserve requirement and five interest rate hikes. In the past eight weeks there have been no hikes. With the turmoil in global markets and falling commodity prices, its hard to imagine them hiking now.

Sentiment and momentum should continue to dominate Asia-Pacific trading but one data point to watch is Chinese trade balance. For us, THE MOST OVERLOOKED ECONOMIC DATA POINT ANYWHERE is Chinese imports. This is an excellent, early indicator of global demand. If the Chinese are unwilling to import raw materials it shows that they are seeing low demand and/or expect global economic growth to slow. The consensus is for a 22.0% y/y rise after the 19.3% prior.

Although Bernanke said the cost/benefit analysis of further QE is not justified, the Fed simply cannot afford to deprive markets from any remaining stimulus, especially at a time when fiscal policy has run outcourtesy of Republicans insistence of using only spending cuts, ruling out any tax hikes. The 4 options for the Fed are 1) more QE, 2) cutting interest on bank reserves in order to force them to lend; 3) Operation Twist whereby selling short-term treasuries & buying long term ones in order to flatten yield curve; 4) adding TIME .

4) adding TIME .element to statement by indicating Fed will hold securities for an extended period of time, or simply say they will not start selling UNTIL..GDP growth or inflation show marked improvement. The Fed could also further downgrade its growth forecasts in order to trigger mkt expectations that more further stimulus lies ahead. The Fed can use the Aug 26 Jackson Hole economic symposium of world central bankers and economists to deliver an inter-meeting policy change (if markets selling off hard as was the case in August 2007). REGARDLESS, most fixed income traders (not necessarily economists) are persuaded that a double dip is around the corner, and only full-fledged QE3 will help support stocks. ANY SIGN that Bernanke will not show this, would weigh on equities and place a temporary cap on metals to the benefit of the US dollar.

Our Tuesday Premium trades hit all targets in EURGBP GBPJPY, gold..see the rest of the trades here http://ashraflaidi.com/products/sub01/access/?a=471 .To become a subscriber, click here: http://ashraflaidi.com/products/sub01/

Ashraf Laidi

Watch Ashraf's charts analysis on Silver & Gold/Silver ratio analysis on Cantos

http://tinyurl.com/3kyrfjw

Arabic speakers can watch Ashraf on AlArabiya on Tuesday 11:30 GMT (15:30 Dubai Time)

European equities set to plunge on the open, after US falls, UK manufacturing data to give clues about Q3 growth, China economic data shows further tightening remains possible, while markets await FOMC, as gold continues to soar

European markets are expected to open significantly lower today after last nights plunge in the Dow, as fears about another global recession grow.

Concerns about Q3 growth prospects in the UK could well be reinforced this morning with the release of industrial and manufacturing production data for June with expectations of a significant drop from Mays numbers. Expectations are for a drop to 0.4% from 0.8% for industrial production, while manufacturing is expected to drop from 1.8% to 0.3%.

Trade balance numbers for June are expected to come in at -8.1bn from -8.48bn in May. With the Bank of England quarterly inflation report due tomorrow any disappointment here is likely to be a prelude to a significant downgrade of this years growth forecast.

Chinese CPI data for July shows no signs of slowing down despite the recent tightening efforts of the Peoples Bank of China, coming in above expectations at 6.5%, raising expectations that the Chinese authorities may look at further tightening measures. Given the current turmoil in global markets, however and falling commodity prices the Chinese authorities may well opt to wait and see. Industrial production data for July and retail sales data which was expected to be released appears to have been delayed until later in the week.

Japanese consumer confidence for July increased from 35.3 in June to 37 in signs that the Japanese consumer continues to struggle in the wake of the effects of the March tsunami.

Our Tuesday Premium trades include 3 charts on silver, GBPJPY and EURGBP, as well as more trades on EURUSD USDJPY and gold.

Latest Premium Trades here: http://ashraflaidi.com/products/sub01/access/?a=471 .To become a subscriber, click here: http://ashraflaidi.com/products/sub01/

Later this afternoon markets await the latest FOMC meeting where market participants will be looking to gauge whether Bernanke will give any clues as to the timing of a possible QE3, given the falls in equity markets in recent days.

Gold prices have continued to make record highs against the US dollar, single currency and the pound as investors flee to the perceived safety of the yellow metal.

The severity of the latest equities selloff is underlined by the fact that the S&P500 has knifed below its 200-week MA of 1155, the first decline below this key MA in exactly 3 years (since August 2008). See our latest trades what it means when we include the DJIA. Gold knows no limit as the combination of inevitable dovish language from Bernanke and the loss of global confidence. Our Tuesday Premium trades include 3 charts on silver, GBPJPY and EURGBP, as well as more trades on EURUSD USDJPY and gold.

Latest Premium Trades here: http://ashraflaidi.com/products/sub01/access/?a=471 .To become a subscriber, click here: http://ashraflaidi.com/products/sub01/access/?a=471

Ashraf Laidi

The US debt downgrade and ongoing sovereign crisis sparked the worst stock market selloff since 2008 on Monday. In FX, CHF was the market leader while AUD and NZD lagged. The focus now switches to China's monthly data slate including CPI, industrial production and retail sales.

The S&P500 fell 6.7% to 1119 in the worst one-day decline since Dec 2008. Volume was nearly double the one-year average. At this point, the panic seems overdone. The US downgrade certainly wasn't a shock and the market moves appear to be more sentiment driven than news driven.

The forex market hasn't displayed the same type of panic as stocks, primarily because the knee-jerk reaction isn't as clear. The obvious safe havens like JPY and CHF are already at extreme levels and the risk of intervention looms. The set-up has left precious metals in an enviable position. Gold hit a record on Monday and silver rallied. We remain upbeat on precious metals, see Ashraf's latest thoughts in the Premium section.

The turmoil in markets has sent a strong signal to the FOMC demanding action at tomorrow's meeting. Policymakers are likely to commit to lower rates for longer or lay the groundwork for QE3. Something along those lines is likely to send risk assets rebounding while total inaction would compound the pain. We note that the Bernanke Fed has always been extremely responsive to stock markets so we have little doubt the Fed will take some action.

In any case, there is little the Fed can do for the economy. With 10-year yields falling to 2.22% today, borrowing rates are already near historical lows. The most the Fed can do is inspire confidence. Given that, we would turn outright bearish on risk assets if the Fed takes action and the market is not impressed. This would signal a loss of faith in the Fed.

Asia-Pacific Preview

Up first are the minutes of the July 17 BOJ meeting at 2350 GMT. This was not the meeting where officials decided to intervene in fx but it may contain hints about the role of JPY appreciation on the economy.

The monthly Chinese data slate will be a major focus at 0200 GMT. China's stock market has fallen into a bear market on fears of interest rate hikes and a slowing global economy. The CPI is expected to remain steady at 6.4% y/y; industrial production up 14.7% y/y compared to the 15.1% prior; and retail sales steady at 17.7% y/y.

Given the prevailing negativity, we believe a 1-2 percentage point beat in IP and/or retail sales will be necessary to improve sentiment. The CPI reading will be most important with a rise above 6.5% seen as the precursor to a rate hike.

Later, at 0600 GMT, Japan releases preliminary data on machine tool orders. The prior was 53.3% y/y.

All sorts of reasons given to the metals rally, including the downgrade of the US AAA rating by S&P, but not many talking about most obvious, which is tomorrows FOMC decision. With the US economy increasingly approaching a double-dip and the Bernanke widely anticipated to pave the way for further stimulus, metals remain favoured. The Fed will to continue signalling its readiness to introduce further measures, regardless of the central banks opinion about the cost-benefit analysis of further QE. There is also the possibility of further downward revisions in ....

There is also the possibility of further downward revisions in GDP growth forecasts for 2011 and 2012. As markets continue to sell-off, the objective of the next stimulus would have to address market liquidity as well as economic stability. With markets already remaining on the defensive and the macroeconomic picture deteriorating, Bernanke cannot afford to be tight-lipped about further QE. And if he does, we could well see the Fed return later in the summer with extra measures, as they have frequently done before after FOMC meetings. Meanwhile, JPY and CHF strength is here to stay and so is the robustness in metals. Mondays Premium trades in EURUSD, HIT ALL LIMITS, so have most of the LIMITS IN GBPJPY. Meanwhile, our short gold and long silver continue working. See the rest of our trades in

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Ashraf Laidi

ECB to reactivate SMP and buy Italian and Spanish bonds, S&P downgrade sends US dollar to record lows ahead of FOMC, while Japanese officials fret about yen strength as gold surges. Gold breaks above $1700, Gold/Oil Ratio highest in Dec. Link to Monday's Premium Trades is below.

Equity markets have continued their declines in Asia overnight as fears about central banks ability to deal with the unfolding crisis in Europe, and concerns about the US economy gather pace in the wake of the weekend decision of S&P to downgrade the US.

The decision by the ECB to reactivate its bond buying program could well bring some respite to Spanish and Italian bond yields, however given the level of the problems in the Euro zone it isnt likely to change the problems facing the euro area in the longer term. The pledge was in response to the announcements made by the governments of Italy and Spain over the weekend concerning bringing forward new measures as well as reforms in fiscal and structural policy. The council also noted the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

Standard and Poors decision to downgrade the US triple A credit rating while creating a political storm surely cant have been too much of a surprise given the agencys recent comments and the debacle over the debt ceiling. As it is the US dollar hit fresh lows against the Swiss franc in Asia overnight as investors continued to flock towards the perceived sanctuary of the Swiss currency. Fears that the rise in the Swiss franc is damaging the Swiss economy caused Swiss National Bank governor Hildebrand to call the current level of the franc absurd on Friday. The recent steps taken by the SNB to try and devalue the franc last week though could well exacerbate the problem, given that in cutting rates to zero, the Swiss franc can now be seen as a funding currency for the carry trade, in the same way the yen has been used in recent years.

The recent move by Standard and Poors has also kept the pressure on the Japanese currency as it continues to gain, moving back towards its all time lows at 76.20/30 once more. Japanese officials have reiterated their determination to sell yen to try and exert downward pressure on the currency.

Gold prices have surged with the yellow metal hitting record highs above $1,700 an ounce.

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