August 2009

Threats to the US Could Spell Trouble for the Broader Market

There has been a lot of talk recently about the US dollar, and the financial powerhouse that backs it, losing its global tout. So far, this is an argument emanating predominately from emerging market economies or it has been treated as a academic discussion. However, this is not likely to be a debate that simply fades into the background – especially with much of the global economy still trying to recover from what many policy authorities have labeled a US-borne financial crisis and with new problems developing.

Regardless of whether the US was the source of the worst financial crisis and global recession since the Great Depression, it is clear that the health of the world’s largest player will have a profound impact on broader activity going forward. Taking up the call of stability and a return to normal for the markets, it seems that we are on a slow path to recovery. However, as most of the default warnings from central bankers and financial ministers around the world would suggest, there are likely to be bumps along the way. For the US, some of these bumps could turn into mountains sooner or later. What should we keep our eye on going forward?

Federal Reserve Disclosure

During the worst of the financial meltdown through the second half of 2008 and the months of ‘stability’ that followed, governments and central banks were extending emergency loans and guarantees to prevent a full-blown collapse.  However, after months of relative calm and advancing market benchmarks along with ballooning fiscal deficits, the call for full disclosure of how tax payer money is being spent is a call difficult to ignore. The argument that names and numbers regarding the Federal Reserve’s loans should be kept off the books to prevent another crisis is quickly losing its influence. In fact, a US federal judge ruled today that this argument is ‘conjecture, without evidence of imminent harm.’ Consequently, the ruling requires the central bank to release reports it has within five days and it must make an effort to seek further documentation at the Federal Bank of New York (which is responsible for most of the lending programs).

Should this finding hold, it has the potential to confirm true market stability or otherwise spark the next panic. A run on Lehman Brothers by clients and lenders spelled a quick end to the venerated bank. With the fed reporting names on those that have accepted federal aid, amounts and even collateral posted, we will quickly find out whether investor confidence is stable or not. It would take a panic with only one bank to adversely impact credit markets and potentially pop the recent bullish speculative bubble in the markets. On the other hand, should the information elicit little negative response; it may be taken as a sign that confidence is more rooted than many had expected.

Toxic Debt

With risk appetite slowly recovering and investor capital slowly returning, looming problems are often overlooked. Perhaps one of the most dangerously neglected concern is what will happen to the massive amounts of toxic debt still filling out the markets. The US government is attempting to move its holdings off its books; but the Public-Private Investment Program they have established is struggling to find demand. There has been enough interest to lower the yield on this investment, and the subsequent lack of demand has led to discussion of opening the program to pension funds and other large – and supposedly stable – pools of wealth. Clearly, if conditions worsen once again and this debt is deemed toxic once again, it could potentially lead to another crisis.

In reality, toxic debt is still prevalent throughout the global markets. There have been efforts made to reduce the derivative obligations; but completely deflating exposures down to the assets that back them would mean a sudden evaporation of trillions of dollar of market capital. This means banks will have to hold on to these risky positions until market demand reaches a level such these assets can be traded and are no longer considered toxic. However, if we meet another crisis before this relief is found, it could end up being the source of another recession.

Deficits and Growth

A true advance in the markets has to develop alongside a genuine recovery in economic activity (credit has proven a substitute in the past; but doesn’t seem a likely fuel going forward). However, the outlook for growth is a cautious one at best. Forecasts from economists and policy officials alike are riddled with cautionary notes. The general consensus is that while the recession is stabilizing, expansion will be subdued until consumer spending can be recharged. With a lagging and steady advance in unemployment, drop in wages and ballooning default rate; consumer spending won’t likely be a contribution to growth anytime soon.

Another long-term consideration (after the influence of sentiment further settles and genuine fundamentals come into play) is deficits. In the effort to stabilize economies and markets, the world’s governments pumped record amounts of stimulus and capital into the system. While these loose policies will help to stimulate a recovery; they will hamper growth and investment. Therefore, the timing and approach to working down these massive deficits is a delicate procedure with major repercussions.

Written by: John Kicklighter, Strategist for CFDTrading.com
Questions? Comments? Send them to John at jkicklighter@cfdtrading.com.

Daily Commodities Fundamentals: Crude Falls Sharply While Metals See Little Change

North American Commodity Update, Last Updated 8/25/2009 4:05 PM EST (GMT = EDT +5:00)

Daily Commodities Fundamentals: Crude Falls Sharply While Metals See Little Change

Commodities – Energy

Crude Falls as Sentiment Wanes on Market Rally

Crude Oil (WTI)   $71.83                               -$2.54                               -3.42%
Crude oil fell ahead of the upcoming API report due at 16:30 EST as traders sold the commodity after it failed to break above resistance. Briefly, crude crossed above $75 a barrel but fell quickly below with traders sending the price to nearly $71 as the afternoon rolled on. While equity markets closed higher in Europe and the US, there was initial concern as Asian stocks dropped while Europe suffered profit taking early on. Sentiment may indicate that rallies in global stocks may be temporarily stalled, which could bode poorly for crude. Also, while stimulus spending kicks into high gear in 2010, the prospects for demand remain murky. Excluding autosales, US durable goods may rise less than one percent in tomorrow’s monthly release, according to the current Bloomberg consensus. Also impacting trading today was a return in risk aversion that saw the Japanese yen as the best performing currency while commodity and exporting nations, New Zealand, Australia and Canada, fell. The rapidity of the recent move is not one which should be ignored, as further downside appears likely, however much will depend on tomorrow’s release of inventory reports by the Department of Energy.

Commodities – Metals

Metals Pare Gains Following Volatile Session

Gold                   $946.2                           +$2.5                              +0.26%
Gold futures closed marginally higher following a volatile session that saw the metal temporarily recoup yesterday’s loss with a move back above $955 per troy ounce. Longer-term direction for the metal remains uncertain as technical analysis shows no clear direction ahead while fundamental forces could bode well for either case. On the one hand, inflation remains subdued through the rest of the year, along with risk appetite increasing that limits the safe-haven metal’s appear. On the other side, economic recovery could create a considerable boost for jewelry demand, which remains one of the strongest forces affecting the price of the metal. Of note, several large institutions including JPMorgan and Standard Chartered expect gold to rise above $1,000 before the end of the year.

Silver                 $14.31                   +0.079                               +0.56%
Silver prices moved slightly higher and paring larger gains that sent the metal above $14.45 earlier in the session. The metal has recovered much of its decline yesterday and largely followed general market trends into its positive close. While silver remains well off its highs, resistance above $14.50 may limit an advance and should trade remain depressed, the metal may move lower in the near-term.

-Written by Roman Kadinsky, CFDTrading Research
Questions/Comments about this article? Send them to Rkadinsky@fxcm.com

European Stocks Pared Losses to Close Higher on Strong Data Releases

Europe Session Key Developments

•    Strong Data Buoys Stocks
•    Optimism Lingers Despite Valuations

European Markets initially opened in the red as traders took profits following the sharp rally seen in recent days. Analysts were not as upbeat as JPMorgan Chase downgraded raw materials and mining sectors to “neutral” along prices for commodities seeing a drop on Tuesday. Despite the pressure however, stocks ultimately moved into positive territory in the afternoon as data in Europe and the US helped lift sentiment toward a quick, perhaps sustainable, recovery. German GDP and other data came in mostly as expected, although domestic demand fell more than expected. Meanwhile, a BBA report showed that loans for house purchasing rose sharply by nearly three thousand, slightly above the consensus estimate. US data sealed the session as the Case-Shiller Home Price index rose along with consumer confidence. Why stocks continue to push new highs, with the FTSE now up 40% from its lows while the FTSEMIB in Italy is higher by nearly 80%, concern remains a constant fear. Comments yesterday by the CEO of US bank SunTrust, along with news today that French investment bank Natixis may be receiveing a guarantee on risky assets by its parent company, have raised risk aversion and quelled the momentum seen in the past few days.

FTSE 100                      4,916.80                   +20.57               +0.42%
Stocks in the UK closed higher with the smallest move of the five majors. Thus far, the UK has the smallest gain off March lows and remains the weakest of the major indices. This could be due to lingering concern over the strength of the housing and financial industries, along with domestic demand weakness. While France and Germany have taken considering spending actions that led to growth in the second half, the UK has seen a decline and may be expected to underperform economically in the quarters ahead. Stocks seeing considerable gains included a 4.83% group in publicly traded hedge fund Man, followed by a 3.86% rise in Royal Bank of Scotland. Miners meanwhile took a drop as JPMorgan’s downgrade of the sector, along with lower prices, caused traders to sell. Kazakhmys and Antofagasta both fell more than three percent.

CAC 40                     3,680.61                   +28.44                 +0.78%
French equities rose more than three-fourths of one percent as Telecom rallied 3.74% on a JPMorgan sector upgrade, while Consumer Goods and Consumer services both rose nearly two percent. Weakness meanwhile was evident in Basic Materials and Financials, both down fractionally. Cosmetics company L’Oreal gained the most at 5.09% following an upgrade by Jefferies and a price target increase from Oddo Securities.

DAX                         5,557.09                    +37.34             +0.68%
German stocks closed higher by more than half of one percent as Industrials and Telecom climbed more than two percent each and gains proved minimal in Financials and Utilities. Volkswagen continue to decline, leading the losers for the second day as the stock fell 2.77%. Engineering firm Siemens, meanwhile, gained the most at 3.8% following by chemical producer BASF, also up more than three percent.

IBEX 35                     11,427.80                   +124.00                 +1.10%
Stocks in Spain climbed the most of the five majors, with the index now standing near a 25% gain since the start of 2009. Winners outnumbered losers by a ratio of two to one and seven of nine sectors closed higher. Financials and Oil & Gas gained more than one percent each as Banco Popular advanced 3.71% and Banco Bilbao, Spain’s second largest bank and recent acquirer of failed US bank Guaranty, climbed 2.87%.

S&P/MIB                        22,473.83                    +118.97                  +0.53%
Stocks in Italy closed higher by more than half of one percent as the index followed the positive movement of other indices in Europe. Notable moves included jeweler Bulgari continuing to climb with a 3.88% gain while many stocks rose more than two percent, including second-largest bank Intesa Sanpaolo and insurance companies Assicurazioni and Fondiaria. On the lagging end, Banco Popolare and Unicredit, Italy’s largest bank, both fell more than one percent.

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com

Euro Consolidates Near Top of Range

Euro / US Dollar
60 Minute Bars

The EURUSD is threatening to break higher and test the December 2008 high of 1.4723.  A potential target is 1.5245, which is the 78.6% retracement of the decline from above 1.6000.  This level intersects with potential trendline resistance at the end of September.  Focus remains on the short term advance from 1.4044, which is in 5 waves.  It is possible that a correction is complete at 1.4252 (38.2% of the rally) but a larger more complex correction could end below that level – which would expose the 1.4170-1.4200 zone.

British Pound / US Dollar
Daily Bars

The GBPUSD could be in the latter stages of an ending diagonal (from 1.5800).  Only a drop below 1.5980 would suggest that the larger trend has rolled over.  Until then, a rally to a fresh 2009 high is possible in wave v to complete the diagonal.  Looking out further, targets in the event of a breakout are round number resistance at 1.7500 and Fibonacci resistance at 1.8238 (intersects with potential trendline resistance at the end of September).

Australian Dollar / US Dollar
Daily Bars

As the AUDUSD nears its 2009 high, the bearish short term pattern is called into question.  Potential for a breakout exists as long as the AUDUSD is above .8151.  A potential target is the 78.6% of the decline from .9856, just above .9000.  This level intersects potential trendline resistance on the same day that the EURUSD resistance line intersects its 78.6% retracement (end of September).

New Zealand Dollar / US Dollar
Daily Bars

As long as the NZDUSD is within the well defined upward sloping channel, calling for a top is a dangerous.  The pair is now pressing against its 2009 high and looks poised to make new highs.  A blow-off top looks likely and potential topping areas are .7250 (61.8% extension of .4890-.6601/.6193) and .7507 (78.6% retracement of decline from .8219).

US Dollar / Japanese Yen
240 Minute Bars

After a false break through channel resistance, the USDJPY is back below both the 55 and 200 day moving averages.  The pair has failed at the 38.2% of the decline from 97.81 and Fibonacci resistance extends to 96.13.  I like the idea of selling rallies with stops above 97.81.

US Dollar / Canadian Dollar
Daily Bars

The USDCAD rally from 1.0631 is in 3 waves.  The form suggests that the trend remains down.  A break to a new low would expose a Fibonacci extension at 1.0317, the 78.6% retracement at .9914 and the 100% extension of the 1.3068-1.0782 decline at .9444.  This level intersects a potential channel line at the end of September.  1.0950 is resistance.

US Dollar / Swiss Franc
Daily Bars

Failure to stay above 1.0561 suggests that the USDCHF is headed for a test of the December 2008 low at 1.0367.  Dropping below there would possibly complete a 3 wave drop from 1.2303.  A target is near parity (1.0037 is the 100% extension). 1.0690 is potential resistance.

British Pound / Japanese Yen
Daily Bars

A support line is giving way and a break below the daily lows near 153.50 would expose the July low below 147.00.  The short term bearish bias is against yesterday’s high of 156.80.

Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday) and the DFX Trend Index every day after the NY close.  He is also the author of Sentiment in the Forex Market.  Follow his intraday market commentary at DailyFX Forex Stream.  Contact Jamie at jsaettele@dailyfx.com

Dow and Nasdaq Threatening To Break Above Ressitance Levels

The Dow has finally reached the 9,500 level which could slow its advance, with a possible retrace to support at 9,115.  A break above there leaves the 61.8% Fibo level of 11,867-6,470 as the next barrier.

The S&P has broken above the 38.2% Fibo level at 1,013 which has held as resistance. The bullish thrust could extend to test psychological resistance at 1,050.

The NASDAQ has rallied to break above the 61.8% extension could lead to a resumption of the bullish trend

Stocks in Asia/Pacific Pull Back, Crude Oil Prices Fall From 10-Month High

Asia Session Key Developments

• Hong Kong Exports Slump in July
• SunTrust Bank Sees Risk for Further Credit Losses

The Asian equities market tipped lower on Tuesday, with the Nikkei falling back below 10,500 after marking its biggest decline since May. At the same time, commodity prices pulled back after pushing higher on Monday, with crude oil falling back from a 10-month high to trade at $73 a barrel. Nevertheless, a report by the Hong Kong government showed the trade deficit widened to 21.7B from 16.5N in June as exports tumbled at an annual pace of 17.8%, which exceeded expectations for a 15.0% drop in foreign demands. The breakdown of the report showed demands from China slipped 15.3%, with shipments to the U.K. slipping 30.7%, while exports to the U.S. tumbled 29.4%. The data foreshadows a weakening outlook for global economy and reinforces fears of a slower recovery, and businesses may continue to scale back on production and employment in an effort to weather the slump in global trade.

NKY 225                                           10,497.36

The Nikkei fell 83.69 points (0.79%) after marking the biggest rally since May 7 to end the trade at 10,497.36, with 9 of the 10 components tipping lower. Telecommunications lost 1.38% on the day to lead the decline, while technology slipped 1.33%, which was followed by a 1.13% drop in consumer services. Honda Motor Co and Canon Inc slipped 1.97%% and 1.08%, respectively as the Japanese yen continued to appreciate against its currency counterparts and hampered the outlook for foreign demands, while Daiwa Securities Group, the second-biggest brokerage firm in Japan, tumbled 3.16% after SunTrust Bank raised its outlook for credit losses in the U.S. At the same time, NGK Insulators Ltd rallied 3.65% after a newspaper report said the firm won a bid to supply Abu Dhabi with rechargeable batteries, while shares of Pioneer Corp surged 11.70% to lead the index higher.

HSI                                                         20,435.24

The Hang Seng index slipped 100.70 points (0.49%) to end the day at 20,435.24, led by a 1.32% drop in technology. Moreover, shares of Aluminum Corp of China slipped 1.85% after the firm reported its third consecutive quarterly loss, while PetroChina declined 1.02% as crude oil prices pulled back from a 10-month high. At the same time, Cnooc Ltd held flat on the day, while China Construction Bank slipped 4.3% after Chairman Guo Shuqing said ‘excess liquidity’ in the first half of 2009 has led to asset bubbles.

ASX 200                                            4,405.80

The ASX tipped lower on Tuesday, with the index falling 20.30 points (0.46%) to end the session at 4,405.80, led by a 1.80% drop in utilities. Moreover, consumer services slumped 0.98%, with basic materials slipping 0.94% on the back of falling commodity prices, while health care lost 0.63% on the day. At the same time, shares of Woolworths increased 2.21% after teaming up with Lowe’s to expand its reach in Asia/Pacific, while WorleyParsons Ltd advanced 6.62% after UBS increased the firms rating to ‘buy’ from ‘neutral.’

Notable Asian Session Event Risk / Economic Releases

Daily Commodities Fundamentals: Commodities Mixed as US Equities Pare Earlier Gains

North American Commodity Update, Last Updated 8/24/2009 3:00 PM EST (GMT = EDT +4:00)

Commodities – Energy

Crude Rises as Equities Move Higher on Central Bankers’ Optimism

Crude Oil (WTI)   $74.36                               +$0.47                               +0.64%
Crude traded in the afternoon higher by more than half of one percent after peaking at an intraday high at 74.81 prior to the opening of US equity markets. The commodity remains in murky territory near possible resistance as, following a rise on August 19, oil has since seen hardly any upside. Speculation for demand remains high with traders now expecting the upcoming energy reports from the DoE to show further declines in inventories. Government efforts, including the recent cash-for-clunkers program that led to approximately 750,000 new vehicle purchases in August, have likely created a temporary boost while consumer spending trends remain weak. As US markets pared gains into the close, charting may suggest the rally may be at a turning point. Also of note, near-term maturing crude contract have bridged over the past few months the large contango in prices seen in longer-term contracts. The difference, now just several dollars for contracts many months away, may be evidence that present oil prices are well priced and that future expectations are not necessarily much higher.

Commodities – Metals

Metals Trade Higher on Friday While Momentum Remains Uncertain

Gold                   $944.5                           -$10.2                              -1.07%
Gold futures initially traded sideways before seeing significant volatility in the middle of the day. Between 12:40 and 13:10 EST, the metal saw a drop from $953 per troy ounce to just above $935. Since then however, gold has settled in a range around $945. Moving the commodity today were comments over the weekend from central bankers that monetary easing would not be tightened in the near-term as inflation remains a minor concern. Also stoking concern, Israel’s central bank took the first step of a major nation and raised its rate by twenty five basis points. While not significant on a macro basis, the ability of banks to fight inflation should it become a threat will likely keep gold prices subdued.

Silver                 $14.155                   -$0.044                               -0.31%
Silver prices moved lower following early upside as equities in Asia rallied, including a 3.35% gain in Japan’s Nikkei225, and European markets also gained more than one percent. The metal had traded as high as $14.51 but pared the move as US equity markets gave up gains early in the afternoon. Unlike gold, silver is more frequently used in industrial applications and thus will move in relation to equities and economic projections.

-Written by Roman Kadinsky, CFDTrading Research
Questions/Comments about this article? Send them to Rkadinsky@fxcm.com

Dollar Under Pressure as Euro Threatens 2009 Highs

-EURUSD support is 1.4200-1.4280
-AUDUSD and NZDUSD hold channels
-USDJPY resistance extends to 96.00
-USDCAD breaking down
-GBPJPY support line holds

Euro / US Dollar

The EURUSD is threatening to break higher and test the December 2008 high of 1.4723.  A potential target is 1.5245, which is the 78.6% retracement of the decline from above 1.6000.  This level intersects with potential trendline resistance at the end of September.  1.4200/80 is a support zone and bulls are firmly in control as long as price is above 1.4044.

British Pound / US Dollar

The GBPUSD is lagging other USD majors. A range has taken hold between 1.6660 and 1.6260. On intraday charts, the consolidation looks like an inverse head and shoulders. Trading through the top of the range exposes Fibonacci resistance at 1.6793 followed by the 2009 high at 1.7047. Looking out further, targets in the event of a breakout are round number resistance at 1.7500 and Fibonacci resistance at 1.8238 (intersects with potential trendline resistance at the end of September).

Australian Dollar / US Dollar

As the AUDUSD nears its 2009 high, the bearish short term pattern is called into question. Potential for a breakout exists as long as the AUDUSD is above .8212. A potential target is the 78.6% of the decline from .9856, just above .9000. This level intersects potential trendline resistance on the same day that the EURUSD resistance line intersects its 78.6% retracement (end of September). .8286 is short term support.

New Zealand Dollar / US Dollar

As long as the NZDUSD is within the well defined upward sloping channel, calling for a top is a gamble. We were able to identify a short term top last week but the pair is now pressing against its 2009 high and looks poised to make new highs. A blow-off top looks likely and potential topping areas are .7206 (61.8% extension of .4890-.6601/.6149) and .7507 (78.6% retracement of decline from .8219).

US Dollar / Japanese Yen

After a false break through channel resistance, the USDJPY is back below both the 55 and 200 day moving averages. 95.00-96.00 is resistance.

US Dollar / Canadian Dollar

The USDCAD rally from 1.0631 is in 3 waves. The form suggests that the trend remains down. A break to a new low would expose a Fibonacci extension at 1.0317, the 78.6% retracement at .9914 and the 100% extension of the 1.3068-1.0782 decline at .9444. This level intersects a potential channel line at the end of September. 1.0880 and 1.0950 are short term resistance levels and bears are favored below 1.1130.

US Dollar / Swiss Franc

Failure to stay above 1.0561 suggests that the USDCHF is headed for a test of the December 2008 low at 1.0367. Dropping below there would possibly complete a 3 wave drop from 1.2303. A target is near parity (1.0037 is the 100% extension).

British Pound / Japanese Yen

A support line has held so look higher (as long as the line holds). A break above 163.10 exposes the 61.8% retracement of the decline from 216 at 171.90. Failure to hold 153.44 may result in a test of the July low below 147.00.

Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday) and the DFX Trend Index every day after the NY close. He is also the author of Sentiment in the Forex Market. Follow his intraday market commentary at DailyFX Forex Stream. Contact Jamie at jsaettele@dailyfx.com

Asian Stocks Surge Higher With the Nikkei Leading the Advance, Oil Rises to $74/bbl

Asia Session Key Developments

• Japanese Supermarket Sales Slump in July
• Crude Oil Hits $74/bbl

Stocks in Asia/Pacific surged higher on Monday, with the Nikkei 225 jumping 3.35% to lead the major indices higher as investors raised the outlook for a global recovery. However, the economic docket continued to reinforce a weakening outlook for the world’s second largest economy as supermarket sales in Japan fell at an annual pace of 4.8% in July to mark the eighth consecutive decline, and private-sector spending is likely to remain subdued throughout the second-half of the year as households face a weakening labor market paired with tightening credit conditions. Moreover, new motor vehicle sales in Australia slumped 6.9% in July to mark the biggest decline since January 2001, while demands slipped at an annualized rate of 10.4% from the previous year however, policymakers may continue to hold an improved outlook for future growth as the central bank anticipates  the economy to expand later this year.

NKY 225                                           10,581.05

The Nikkei 225 surged 342.85 points (3.35%) to 10,581.05 on Monday to lead the major benchmark indices higher, with all of the 10 components advancing on speculation for a global recovery. Technology gained 5.13% to lead the index higher, with industrials and basic materials advancing 3.65% on the back of higher commodity prices. Shares of Mitsui Mining & Smelting Co jumped 5.95% on the back of higher metal prices, with Inpex Corp adding 5.42%, while Nippon Metal Industry slumped 4.8% to weigh on the overall market after lowering its full-year net income projection by 59%. At the same time, Fujitsu advanced 4.64% as Macquarie Group raised the stocks rating to ‘outperform,’ while Honda Motor Co rose 3.21% after a newspaper report said the carmaker plans to release a small batter-powered car in the U.S. by 2015.

HSI                                                         20,535.94

Stocks in Hong Kong push higher on Monday, with the Hang Seng advancing 336.92 points (1.67%) to end the trade at 20,535.94, driven by a 4.02% rally in technology. Moreover, basic materials rose 2.80% on the day, while oil & gas climbed 2.43% on the back of higher commodity prices. Shares of Aluminum Corp of China advanced 3.37% after Goldman Sachs increased the share-price forecast for the firm, while China Construction Bank added 2.57% as first-half profits topped market expectations. At the same time, China Resource Power Holdings jumped 5.54% as profits doubled in the first-half, while Cnooc added 3.49% as crude oil prices rose to $74 a barrel.

ASX 200                                            4,426.10

The Australian stock market bounced back on Monday, with the ASX advancing 135.50 points (3.16%) to end the session at 4,426.10, led by a 4.02% rally in basic materials. Shares of BHP Billiton rose 4.29% on the back of higher commodity prices, with Rio Tinto gaining 4.74% on the day, while Woodside Petroleum adding 4.09% as oil prices increased to $74 a barrel. Moreover, Billabong International surged 7.65% after Macquarie Group raised the firms rating to ‘buy’ from ‘hold,’ while Newcrest Mining advanced 2.77% as Credit Suisse upgraded the stock to ‘outperform.’ At the same time, Qantas Airways added 4.76% after its Jetstar division said it plans to extend flights to southern Europe over the next two years.

Notable Asian Session Event Risk / Economic Releases

US Dollar, Japanese Yen Still Under Pressure

•    US Dollar, Japanese Yen Still Under Pressure – Bernanke’s Jackson Hole Speech May Trigger Breakouts on Friday
•    British Pound Falls as Widening Budget Deficit Raises Risks for UK Credit Downgrade
•    Euro, Swiss Franc Still Testing Key Resistance vs. US Dollar

US Dollar, Japanese Yen Still Under Pressure – Bernanke’s Jackson Hole Speech May Trigger Breakouts on Friday
US economic data helped provide a boost to equities, and thus weighed on the US dollar and Japanese yen, though trading ranges across the majors were so small one might believe it’s a holiday. Looking to the data on hand, the Conference Board’s leading economic index rose for the fourth straight month in July, this time by 0.6 percent thanks to improvements in the average workweek, jobless claims, stock prices, and the interest rate spread. Meanwhile, the Federal Reserve Bank of Philadelphia’s manufacturing index unexpectedly surged to 4.2 in August from -7.5. This was the first positive reading, signaling an increase in business activity, since September 2008 as prices paid, prices received, new orders, and shipments all rose significantly from the previous month.

The “Philly Fed” improvement was in line with what we saw in Monday’s release of the Federal Reserve Bank of New York’s “Empire” manufacturing index, but also highlights the fact that the only strong-points in the economy have been related to manufacturing, and more specifically exports and automobiles. First, the sustainability of growing exports is questionable as GDP is likely to remain quite low in the economies of the nation’s biggest trading partners through the end of the year. Second, the recent increases in auto sales have been attributed to the “cash for clunkers” program, in which consumers get a cash rebate if they trade in their old car for a newer car with better gas mileage. That said, the impact of the program will not last forever, as it ends next Monday, and an enduring US economic recovery may not be possible until demand for other consumer goods improves, which will be difficult in the face of rising unemployment and the shift away from spending via credit to increased saving.

Other second-tier US data was disappointing, with initial jobless claims rising by 15,000 during the week ending August 15 up to 576,000, while continuing claims rose by 2,000 during the week ending August 8 to 6,241,000. Adding to the mix, the Mortgage Bankers Association of America said that mortgage delinquencies rose to 9.24 percent in Q2 from 9.12 percent, the highest since recordkeeping began in 1972.

Friday’s release of NAR existing home sales could highlight the still-lackluster status of the housing market, as starts and building permits were both mildly disappointing on. Bloomberg News is currently calling for sales to rise for the fourth straight month to an 11-month high of 5.0 million from 4.89 million. While there are many reasons why sales could increase, including the US government’s $8000 tax credit for some homebuyers, low interest rates, and cheaper prices, there are also reasons why recovery in the housing sector may take a while, namely: rising unemployment. As long as the unemployment rate continues to climb, there will be a perpetual downdraft on property sales, which means that growth in the housing market may be quite meager throughout the rest of the year.

The main piece of event risk that traders should be watching, though, will be Federal Reserve Chairman Ben Bernanke’s 10:00 ET speech at the Jackson Hole Conference. The speech is entitled “Reflections on a Year of Crisis,” making it sound like most of his comments will focus on what the Fed has done in response to the financial crisis. No matter what is said, US dollar volatility is likely to pick up quite a bit, but if the speech sticks with a very neutral bias, as we saw in the Federal Open Market Committee’s policy statement last week, the US dollar may continue lower. On the other hand, any comments that stoke fears amongst investors have the potential to spark risk aversion, with flight-to-safety benefiting the greenback and Japanese yen. Regardless, given the very small trading ranges we’ve been seeing and low liquidity throughout the financial markets, there seems to be a big risk of breakouts throughout the majors on Friday.

Related Articles: USD, JPY – Why the Low-Yielders’ Rally May Not Be Over Yet, Yen Crosses: Former Support is Now Resistance

British Pound Falls as Widening Budget Deficit Raises Risks for UK Credit Downgrade
UK retail sales rose by 0.4 percent during the month of July, marking the second straight increase, while the annual rate rose to a 14-month high of 3.3 percent from 3.1 percent.  However, this didn’t have much of an impact on the British pound. Instead, the currency took a hit and finished the day as the weakest of the majors after the UK budget statement hit the wires. The UK government posted a deficit of 8 billion pounds in July, the biggest since recordkeeping began in 1993, highlighting the dour state of the nation’s finances. Standard & Poor’s lowered its outlook on the UK’s AAA credit rating to “negative” from “stable” in May for this very reason, and if we see this trend continue, the risk for an actual downgrade will grow and put greater pressure on the British pound.

Euro, Swiss Franc Still Testing Key Resistance vs. US Dollar
The euro and Swiss franc closed Thursday just below yesterday’s highs against the US dollar, but given the very tight trading ranges and low liquidity we’ve been seeing, there’s no guarantee we’ll see any sort of break overnight. There were no Euro-zone releases on hand, but the Swiss franc gained very briefly following the release of Swiss trade data, as the nation’s trade surplus widened to SFr 2.35 billion from a revised SFr 1.5 billion. The increase was due to a 4.1 percent increase in exports, as European demand improved, and a 1.7 percent drop in imports. The news was encouraging for the Swiss economy, as foreign trades account for roughly half of Swiss GDP. In fact, Q1 GDP contracted at its quickest pace in 18 years after exports dropped 5.4 percent, so today’s data suggests Q2 GDP could show much better results. Adding to this, the Swiss ZEW survey of investor sentiment jumped to a 3-year high of 18.6 in August from 0, signaling a sharp improvement in confidence.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

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