March 2010

Asian/Pacific Retreat on Wednesday as Investors Take Profit

Asia Session Key Developments

• Australian Building Approvals Declines for Second Month
• Japan’s Small Business Confidence Rises to Highest Level Since March 2008

Stocks in Asia/Pacific pared yesterday’s advance, with investors engaging in heavy profit taking as Japan prepares for a new fiscal year. Meanwhile, the economic docket in Australia showed that private sector credit in February advanced for the fourth successive month, while building approvals declined for a second month on the back of government reduced grants. Moreover, Japan’s small business confidence rallied to its highest level since March 2008, while housing starts contracted at an annual pace of 9.3% in February following the 8.1% decline in the previous month.

Nikkei 225                          11,089.94

Stocks in Japan pared yesterday’s advance, leading the Nikkei 225 to shed 7.20 points (0.06%) and close at 11,089.94. Half of the components tumbled lower on the day, with health care leading the way, losing 0.59%, while utilities added 0.49% to taper the rally. Shares of Mitsui O.S.K. Lines advanced 3.55% after its preliminary statement showed net income doubled forecasts, while Nomura Holdings, Japan’s largest brokerage dropped 1.85% amid JP Morgan Chase & Co slashing the company’s 12-month target price from 930 yen to 860 yen. In addition, Mazda Motor jumped 4.78% after reaching an agreement with Toyota Motors, which would license Mazda with the hybrid technology that is used on Toyota’s Prius, while Pac Metals rose 1.44% on the back of higher metal prices.

Hang Seng                        21,239.35

The Hong Kong equity market pushed lower on Tuesday, leading the benchmark equity index to drop 135.44 points (0.63%) and close at 21,239.35. Nine out of the ten components retreated on the day, with consumer goods leading the way, shedding 2.80%, while utilities rose 0.23%. Shares of CNOOC, China’s largest offshore energy explorer sank 1.08% after the company reported full-year profit that missed market expectations, while HSBC lost 1.19% as the company raised $580 million for a fund that will invest in infrastructure projects. Moreover, Henderson Land Development plunged 4.20% as the Hong Kong-based builder has been ordered to explain why just one of twenty five property sales have been completed, while PetroChina climbed 0.44% on the back of higher commodity prices.

S&P/ASX 200 Index           4,875.50

Shares in Australia pared yesterday’s advance, leading the S&P/ASX 200 to decline 41.30 points (0.84%) and close at 4,845.50. Nine out of the ten components pushed lower on the day, with technology leading the way, retreating 1.63%, and was followed by a 1.26% decrease in basic materials. Shares of Carnarvon Petroleum leapt 7.78% as the company announced reserves increased by 9 million barrel, while Beach Energy lost 1.99% as the firm aims to find a partner to develop shale gas resources in Australia’s Cooper Basin. In addition, Harvey Norman dived 1.09% as Australian retail sales and building approvals unexpectedly pushed lower in February, while OM Holdings soared 4.82% as the company considers a secondary listing on the Hong Kong Stock Exchange.

Notable Asian Session Event Risk / Economic Releases

Another Stalled Drive in Risk Appetite and Tumble for the Dollar Keeps Crude Below $83

North American Commodity Update

Commodities – Energy

Another Stalled Drive in Risk Appetite and Tumble for the Dollar Keeps Crude Below $83

Crude Oil (LS NYMEX) -  $82.45  //  $0.28 //  0.34%

Fundamental and technical interests are working together to prevent crude oil from fully developing a renewed bull trend. From price action itself on the benchmark commodity, bulls seem to have lost conviction just below a frequently tested and repeatedly fortified range high in $83. What’s more, this particularly level isn’t even the psychological high that most non-technical traders will react to. Rather, the $84 swing high set back on January 11th will be the level at which the broader markets start paying attention. Technical’s aside, Monday’s momentum (leading to the biggest advance for the active NYMEX crude futures contract in six weeks) was handily sidelined by curbed investor sentiment noted in other risk-sensitive asset classes. Most notably, the Dow Jones Industrial Average maintained chop that has developed over the past week and the US Dollar advanced for the first time in three days. Risk appetite was setback Tuesday by a deteriorating situation in Greece. Just days after the EU reached an accord the member economy has already accessed the debt market twice; and weak demand has cast a long shadow over the nation’s financing abilities over the near and medium-term future.

From speculative concerns to growth’s influence on energy demand, only a few big ticket indicators were available for release; but they carried enough influence to alter the perception of consumption for the immediate future. From the Japanese economy (the world’s third largest energy consumer), a steady bearing on the unemployment rate was offset by notable declines in household spending and industrial production. For the biggest consumer of fuel, the US, consumer confidence ticked higher for March on improved employment perceptions; but plans to make purchases of autos matched a record low. For influence over the crude market, tomorrow’s factory activity report will hold far greater tout. Refocusing on the supply-and-demand in the oil market itself, the American Petroleum Institute’s (API) inventory reading for the week ending March 26th reported a 421,000  barrel increase in crude stockpiles. This goes a long towards confirming a cooldown in tomorrow’s Department of Energy report for the same period. The 2.5 million barrel increase in crude stores would extend the build to a ninth consecutive month. A comparison of demand, imports and refinery capacity are far more important than the headline change though (though not when it comes to immediate volatility).  Outside the normal flux of investor appetites and supply-and-demand balance, there was a remarkable announcement that has preceded the biennial International Energy Form ministerial meeting. International Energy Agency Director Tanaka suggested that the IEF, IEA and OPEC would work together to reduce market volatility. They supposedly intend to accomplish this through greater transparency and shared expertise in forecasting; but regulation is likely the only aspect that could truly have a dramatic impact on price future price action.

Commodities – Metals

A Dollar Bounce Curtails Gold’s Weak Advance

Spot Gold -  $1,104.40   //  -$5.33 //  -0.48%

Just as the dollar index put in for its first advance in three days, its on-again, off-again hedge would subsequently put in for its first decline in four active sessions. The correlation between the two is still remarkably strong, a relationship that can likely be attributed to the recent stability in investor sentiment and sovereign debt risk concerns. Nonetheless, these multiple roles expose the precious metal to sudden swings and bursts of volatility should any one of them spring to life or a complicated fundamental interpretation of events should multiple roles begin to conflict. Today, the dollar’s advance fit nicely into the scenario of speculative caution that was roused by Greece’s debt auction shortfalls. The nation was perhaps zealous in tapping the market Monday with a 5 billion euro auction just days after a plan for rescue was agreed upon. However, with Tuesday’s surprise 12-year auction (which fell remarkably short of its cap 1 billion euro offer), there is now little doubt that the international market is still wary about the credit worthiness of the EU member. And, certainty is not beneficial when it pertains to doubt. On the other hand, the concern surrounding Greece has not gotten to the point where gold’s appeal as an alternative to traditional fiat currencies as a store for wealth has kicked in. That would require far more dire circumstances. In other news, the SPDR Gold Trust (the largest ETF backed by gold) increased its holdings by 5.2 tons to a December 31st high of 1,129.8 tons.

Spot Silver  -  $16.34   // -$0.07  //  -0.37%

With relatively mild changes in the US dollar and risk appetite Tuesday, silver would not put in for any extraordinary moves of its own. Ending the day slightly in the red after setting the smallest range since March 18th (notably just before instituting a notable sell off), silver was gleaning direction from the US dollar but moderating the decline this would encourage with the congestion established with the Dow Jones Industrial Average. Traders in this commodity are awaiting a clear and robust shift in one of these two primary catalysts before significantly changing their positioning.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Asian/Pacific Shares Advance on Growth Optimism, Expectations for Improved Earnings

Asia Session Key Developments

• Copper Surges to 11-Week High
• Japan’s Unemployment Rate Remains Unchanged at 4.9%
• New Zealand’s Home Building Rises for First Time in Three Months

Asian stocks rallied on Tuesday toward a ten-week high as investors held an improved outlook for global growth paired with expectations for higher earnings. Meanwhile, the economic docket in Japan showed that industrial production in February sank 0.9%, exceeding economists’ expectations for a 0.5% drop in outputs, while the region’s unemployment rate remained unchanged at 4.9% in February. Moreover, building permits in New Zealand rose for the first time in the past three months in February, with construction approvals rising 5.9% to exceed forecasts for a 2.0% rise.

Nikkei 225                          11,097.14

Stocks in Japan pared yesterday’s decline, leading the Nikkei 225 to rally 110.67 points (1.01%) and close at 11,097.14 as all ten components pushed higher on the day. Shares of Dowa Holdings climbed 3.08% as the Nikkei newspaper said the company may post an annual pretax profit of 13.5 billion yen, which would exceed the 10 billion yen target, while Fuji Electronics added 2.85%, following the announcement that annual net income was 964 million yen. In addition, Kobe Steel pushed 2.55% higher as the steelmaker narrowed its net loss projection, while Mitsubishi Corp advanced 3.88% after the Sankei newspaper said the firm will make a bid to build two power plants in Kenya.

Hang Seng                        21,371.94

The Hong Kong equity market advanced for a second consecutive session on Tuesday, leading the benchmark index to add 134.51 points (0.65%) and close at 21,374.79. Five out of the nine components pushed higher on the day, with consumer services leading the way, climbing 2.59%, while technology slumped 1.01%. Shares of Li & Fung, the largest supplier to companies including U.S.-based Wal Mart Stores advanced 2.08% as consumer spending in the world’s largest economy advanced for the fifth month in February, while Henderson Land Development added 1.42% as the company plans to build a private hospital. Moreover, China Petroleum pushed 0.16% higher on the back of higher energy prices, while Hutchison Whampoa lost 2.66% subsequent to the company reporting a fiscal year net income of $14.2 billion amid forecasts for $14.6 billion.

S&P/ASX 200 Index           4,916.80

Shares in Australia pushed higher for a third successive day, leading the S&P/ASX 200 to advance 19.50 points (0.40%) and close at 4,916.80. Half of the components rallied on the day, with basic materials climbing 1.56%, while telecommunications dropped 1.22%. Shares AWB rallied 6.15% after reaching an agreement to sell its Geneva trading unit to Gavilon, while Onsteel climbed 2.07% on the back of higher metal prices. At the same time, Gindalbie Metals surged 7.27% as the company plans to sell all of its output from the Karara project to Anshan Iron & Steel Group, while NuFarm, Australia’s largest supplier of farm chemicals slid 6.45% amid Deutsche Bank AG slashed the company’s stock rating from “hold” to “sell.”

Notable Asian Session Event Risk / Economic Releases

A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

North American Commodity Update

Commodities – Energy

A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

Crude Oil (LS NYMEX) -  $82.26  //  $2.26  //  2.82%

The combination of a steady advance in investor sentiment, a retreat for the US dollar and a terrorist attack in Russia would encourage an advance from crude prices. And, proving that this was the correct combination of risk appetite and uncertainty needed to get the speculative crowd’s interest, Monday’s rally was the largest since February 16th (when the market was in the middle of a strong bull trend). However, there is a notable contrast between this impressive rally and the one staged back in the middle of February. This time around, the surge developed within a congestion zone that holds notably below $83 and the psychologically important $84 level. There are still momentum and fundamental hurdles to overcome before this market revives its long-term bull trend. Nonetheless, underlying the correct mixture of fundamental factors this morning was the steady climb in risk appetite. While a critical assessment of the market backdrop may fall short of encouraging a significant buildup in speculative positioning, consistent inflows of capital into specific asset classes (as can be seen in the steady climb in the Dow Jones Industrial Average) have helped to maintain a general bias in an otherwise flat market. From the Dow, a new 18-month high close on the day has kept bulls in control for another. A more active contributor to oil volatility today though was the tumble from the US dollar. Quickly curbing last week’s remarkable breakout, the depreciation in this pricing instrument has leveraged the alternative store of wealth function that this physical commodity has recently exuded. On the other hand, if oil’s strength were simply a factor of the US dollar’s weakness and rising risk appetite, crude priced in Australian dollars would see little to no advance. Yet, in fact, this measure would also appreciate significantly. On this point, we factor in the morning’s terror attack on the Moscow subway system. The uncertainty such events generate may not last long; but they can nevertheless be quite dramatic.

Accounting for those sentiment-based drivers behind crude’s appreciation, it is evident that they are still temporary. In contrast, the supply-and-demand updates are feeding into a larger rebalancing of fundamental interests. Raising the outlook for growth (and thereby the demand for energy to fuel said expansion), the US Commerce Department reported a fifth consecutive monthly increase in personal spending trends. In the scheme of supply-and-demand, a reduction in output is effective but it is consumption that holds the greatest sway over longer-term price trends. In other news, Japan reported its largest increase in retail spending in nearly 13 years while confidence in the health of the Euro Zone economy rose to a 22-month high. These may be small adjustments to global activity, but they are also more permanent. On the other side of the oil consumption gap, the outlook for this week’s Department of Energy inventory report is already calling for a ninth consecutive increase in stockpiles. Already set in the longest build since May with refinery capacity running at 81.1 percent, there is little long-term weight for balancing the market from the supply side anytime soon.

Commodities – Metals

Gold Advances for a Third Day but Gains Notably Smaller than Silver, Crude

Spot Gold -  $1,110.00   //  $2.50 //  0.22%

The same drivers that led the energy bloc and silver to significant rallies Monday were playing in gold’s favor as well. However, there was a notable contrast between the momentum that gold would set versus its counterparts. This distinction likely resides in the metal’s multiple fundamental roles in an otherwise complicated market backdrop. For leverage, the US dollar’s tumble was perhaps the most influential dynamic for price action. The benchmark currency not only retraced gains from last week; but it has pulled back to the point where the subsistence of a renewed bull trend has been cast into doubt. As one of the market’s favored dollar-alternatives (outside of other currencies), gold would stand to benefit substantially if the greenback lost conviction in an advance that has developed since the beginning of December. Another unique driver for the commodity Monday was the bombing of the Moscow subway system. The uncertainty this event provoked leveraged the metal’s historical role as a safe haven. Offsetting some of the “fear” premium the metal would otherwise have attained however, there was an appreciable improvement in confidence surrounding the health of Greece and the Euro Zone this morning. Following last week’s bailout plan accord, Greece announced a sale of 7-year government debt to raise 5 billion euros and start raising the necessary funds to roll over maturing obligations. Conditions seem calm for now in the Euro-area; but should the mere promise of a bailout prove insufficient, the fiat-hedge value of this commodity will quickly recover.

Spot Silver  -  $16.33   //  $0.44  //  2.58%

Silver enjoyed its largest single-day rally in nearly six weeks Monday thanks to the combined influence of appreciation in surface sentiment trends and a drop in the US dollar. The climb in equities (benchmarked by the Dow Jones Industrial Average) was the less significant driver. While the benchmark has maintained a steady appreciation these past few months, there is little in the way of momentum to support it and the building of enduring investment positions is giving way to more sensitive speculative trades. In contrast, the dollar’s stark reversal of a freshly renewed bull trend has caught a greater segment of the market unawares.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

U.S. Equities Gain on Greek Resolution, Higher Spending

U.S. Session Key Developments

•    European Leaders Reach Agreement on Greek Bailout
•    Consumer Spending Grows 0.3 Percent in February
•    Commodities Soar 2.1 Percent on Lower Dollar, Improved Sentiment

U.S. equities started a third straight week in the black as economic sentiment was improved by a resolution in the Greece situation as well as a boost in consumer spending.  European leaders reached agreement on Friday, March 26^th, to endorse the Franco-German proposal for a mix of IMF and bilateral loans at market interest rates for Greece.  The agreement has strengthened the euro since Friday, boosting it from 1.3268 against the dollar on Thursday to 1.3527 after the weekend.  A separate report on European confidence showed that confidence increased more than expected in March, providing added strength for the single currency.  Meanwhile, Greece tested the capital markets for the first time since euro leaders reached the agreement.  The nation sold 5 billion euros of new seven-year debt at 5.9 percent, a yield more than twice that which Germany pays.

U.S. stocks also received a boost from commodities and consumer spending, which grew 0.3 percent in February.  Commodities, as measured by the CRB Commodity Index, gained 2.1 percent as a whole providing major support for resource companies.  Crude oil was among the best performers, strengthening 3.1 percent to $82.51 per barrel.  As is usually the case, commodities rose due to a lower dollar, which fell 0.5 percent against its six major trading partners.

DJIA 30                     10,895.86                      +45.50                       +0.42%
The Dow Jones Industrial Average made another 18-month high as higher commodity prices led resource plays higher.  Among the leaders were Alcoa and Exxon as shares in the companies rose 1.2 and 1.1 percent respectively on higher metal and energy prices.  However, the top performer on the day was Boeing, which gained 2.1 percent after saying stress tests of its Dreamliner wings were “positive.”

S&P 500                       1,173.22                           +6.63                       +0.57%
The Standard & Poor’s 500 index was the best performing major U.S. equity index as all ten sectors closed the session in the black.  Energy and Basic Materials stocks were the top performers as commodity prices soared.  The two sectors were up 1.7 and 1.2 percent respectively as all 37 components of the Energy sector were up.  Financials was among the lagging sectors, up only 0.2 percent.  Shares of Citigroup dragged on the group as the government announced it would sell its 7 billion shares in the bank, sending the stock lower by 3.0 percent.  Citigroup volume represented almost 25 percent of all the trades on the NYSE today.

NASDAQ                       2,404.36                         +9.23                     +0.39%
All ten sectors of the Nasdaq Composite also gained today, while tech stocks, which hold by far the greatest weight, lagged, gaining only 0.2 percent.  The best performing tech stock was Bell Microproducts, which soared 28.4 percent after Avnet agreed to pay $7 a share in cash for the company.

Written by Gary Chalik, CFDTrading Research
Please send any comments about this report to GChalik@fxcm.com

Dollar Mixed as Aussie Soars

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Euro / US Dollar

I maintain that the EURUSD is headed lower in either larger wave 5 or wave 3 of 3.  Risk should be kept to 13573 and 13380-13405 is resistance.  I view 13000 as the next level that could produce a multi day bounce.  13390-13345 is potential short term support.

British Pound / US Dollar

“The extent of the decline from 15380 suggests that wave 4 is complete.  I favor a drop below 14780 over the next several weeks in a 5^th wave.  Similar to the EURUSD, a small 2^nd wave may be complete at 15118.”  Favor the downside against that level.  A move above there would suggest that a triangle or flat is underway since 14780.

Australian Dollar / US Dollar

Bigger picture – A diagonal can be counted as complete from 8800 and the break of 9090 inspires confidence in the downside.  The diagonal from 8800 may complete wave C of an A-B-C correction from just below 8600.  If this count is correct, then the entire advance (from 8600) will be retraced over the next several weeks.  However, the rally from below 9000 is impulsive (5 waves), which suggests additional strength.  9120-9100 is potential short term support.  The picture is mixed.

New Zealand Dollar / US Dollar

The drop below the short term support line indicates that a top may already be in place for the NZDUSD at 7185.  Further, the decline from that point is impulsive.  The rally from near 7000 has reached the 61.8% retracement so the NZDUSD should roll over from here if the larger trend has turned down.

US Dollar / Japanese Yen

The USDJPY move above 9217 and yearlong trendline resistance strongly suggests that the pair is headed above 9380 in what may be wave c of an a-b-c advance from 8481.  I’ll be looking for support to buy into next week.  Multi week targets for the c wave advance are 9710 and 10150-10270.

US Dollar / Canadian Dollar

The USDCAD is vulnerable at the current juncture.  A new low (below 10058) would complete 5 waves down from 10784.

US Dollar / Swiss Franc

No change: “I favor USD strength in a 5^th wave to a new high.  Price needs to remain above 10500 in order to keep the bullish count valid.  In other words, the USDCHF has gone about as far as it can go if the trend is up.”

Gold

“Gold has traded sideways since December and appears to be building a bullish base.  Specifically, the base could be a complex head and shoulders (the head itself is a head and shoulders).”  1075 is potential support.  Failure to hold 1175 would put the February low in jeopardy.  Notice that a head and shoulders top has just been confirmed as well.

Light Crude

After reversing from a gap several weeks ago, crude has stair-stepped lower.  I still favor weakness to at least 7750.  It is possible that the rally from the February low completes wave C of an A-B-C flat.  Exceeding 8350 would suggest that crude is headed higher for a test of 90.

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com.  Traders can meet me at the FXCM Expo in Las Vegas on May 3rd and 4th.  You can register to attend at www.fxcmexpo.com.

Asia/Pacific Shares Advance on Improved Outlook for Future Profits, Nikkei Bucks Trend

Asia Session Key Developments

• Japanese Stocks Fall for the First Time in Four Days
• Copper Heads for Largest Gain in More Than Three Weeks

The equities market in Asian/Pacific extended the rally from the previous week as firms held an improved outlook for future profits, while the Nikkei bucked the trend as Japanese investors booked profits ahead of the new fiscal year. Meanwhile, the economic docket in Japan showed that retail trade rose for the third time in the past five months, with spending increasing 0.9% in February, while sales at large retailers slumped 4.0% amid expectations for a 5.5% decline. Meanwhile, Australian sales of newly built homes slipped 5.2% in February after rising 9.5% the month prior, according to a report by the Housing Industry Association.

Nikkei 225                          10,986.47

Stocks in Japan pared Friday’s advance, leading the Nikkei 225 to shed 9.90 points (0.09%) and close at 10,986.47 as half of the components pushed lower on the day. Shares of SoftBank rallied 3.68% CEO Masoyoshi Son announcing that it will increase capital spending to help prepare its network for an anticipated surge in traffic from its first smart phone with Google’s Android operating system, while Okuma jumped 4.73% subsequent to Credit Suisse Group maintaining the company’s stock rating at “outer perform.” In addition, Tokai Carbon leapt 4.20% as the company announced that it forecasts sales of electrode materials used in rechargeable lithium ion batteries to increase 50% this year, while Hitachi gained 4.52% after the firm announced it will double its revenue by 2015 following the expansion in its train business.

Hang Seng                        21,237.43

The Hong Kong equity market extended the previous week’s advance, leading the benchmark equity index to surge 184.32 points (0.88%) and close at 21,237.43 as all nine components rallied on the day. Shares of China Resources Land soared 4.85% as profits more-than-doubled to HK$4.41 billion in 2009, while CNOOC increased 1.59% on the back of higher commodity prices. Moreover, PetroChina added 1.60% as the company plans to spend at least $60 billion in the next decade on overseas acquisitions, while Foxconn International Holdings advanced 2.44% on speculation Sony will sell its Slovak LCD plant to the company.

S&P/ASX 200 Index           4,897.30

Shares in Australia extended Friday’s advance, leading the S&P/ASX 200 to climb 0.40 points (0.01%) and close at 4,897.30. Four out of the ten components pushed higher on the day, with basic materials adding 0.33%, while health care retreated 0.87% to taper the rally. Shares of BHP Billiton, the world’s largest mining company added 0.23% as its Kwinana nickel refinery in Western Australia restarted operations after an unscheduled 11-day shutdown, while Santos slipped 0.88% as Credit Suisse lowered its rating on the stock to “underperform” from “neutral.” At the same time, MacCarthur Coal surged 2.91% on the back of higher commodity prices, while Myer Holdings, Australia’s largest department-store chain pushed 0.30% higher as the company is targets A$4 billion in annual revenue by 2015 after opening new stores and conducting heavy discounting to lure consumers.

Notable Asian Session Event Risk / Economic Releases

U.S. Equities Generally Lower as European Officials Struggle with Greece Situation

U.S. Session Key Developments

•    European Union Leaders Continue to Discuss Greece Bailout and Possible IMF Assistance
•    Continuing Jobless Claims Higher Than Expected in First Two Weeks of March
•    Treasuries Falter on Weak Seven-Year Auction, U.S. Dollar Index Closes Above 82 Level

U.S. stocks disappointed for a second day as EU officials struggled to agree on the actions necessary to avoid a full-blown fiscal crisis in Greece.  The uncertainty spooked investors during the U.S. session and contributed to a near 2 point decline in the index to 1,165.  The main contention in talks today centered around use of the IMF to contribute to a bailout package.  French and German officials came to an agreement that would make European nations responsible for approximately half of all aid to Greece, while the Washington-based IMF would provide the rest.  ECB President Jean-Claude Trichet strongly resented the move, however, saying that any IMF help would be “very, very bad.”  The euro currency erased early gains following the Trichet commentary and closed lower against the U.S. dollar for a third consecutive day.

U.S. stocks initially traded higher on the session, despite a worse-than-expected continuing claims report for the week ended March 13.  The S&P traded above the 1180 level intraday, but Trichet’s comments quickly turned sentiment sour.  Furthering the bearish case in the afternoon was a weak U.S. Treasury sale of 7-year notes which only drew 3.374 percent and a 2.61 bid/cover ratio.  Traders sold off longer-term U.S. debt for a second day, as 10-year yields and 30-year yields each rose 3 basis points to 3.87 percent and 4.75 percent, respectively.  As for currencies, the greenback continued its strong run, pushing the U.S. Dollar Index to its highest close since May.  The Japanese Yen was especially weak, dropping nearly half a percent against the Dollar.

DJIA 30                     10,841.21                             +5.06                       +0.05%
The Dow Jones Industrial Average was the only U.S. index to close higher today, on a mixed session in which sixteen of the 30 Dow stocks gained.  Disney shares posted the strongest gain on the index today, rallying over 2 percent, while Microsoft and American Express added 1 percent each.  Du Pont was the biggest laggard today, dropping 2.4 percent, while Alcoa fell 1.4 percent and Pfizer shed 1.2 percent.

S&P 500                         1,165.73                             -1.99                        -0.17%
The broad-based S&P 500 fell for a second consecutive day as basic materials and energy shares dropped over 1 percent each despite steady commodity prices.  Consol energy shares plunged nearly 6 percent for the worst performance among basic materials shares, while Peabody Energy and Massey Energy fell nearly 5 percent.  Titanium Metals fell 4.7 percent, snapping a four-day rally for the stock.

NASDAQ                     2,397.41                             -1.35                       -0.06%
Shares on the tech-heavy Nasdaq ticked slightly lower overall due to weakness in commodity stocks and telecommunications.  Technology shares managed to gain 0.1 percent, however, as shares of Qualcomm gained over 4.8 percent on the day.  The chipmaker boosted its fiscal second-quarter outlook today, citing strength in its licensing business and improved chip sales.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

The Fundamentals of Crude Trading

It would seem that the normal laws of supply and demand would be the foundation for establishing the current market price for commodities like crude; and to some extent this is the case. However, when speculative interests are taken into account, the picture becomes fuzzy. While millions of barrels of crude oil are bought and sold each day, consumers and producers look to hedge the risk of a change in price for the raw material before they make the purchase. This is where the futures market comes into play and subsequently where trading conditions become distorted. How does the market come to its fair value price of crude? What is the most influential driver for this specific commodity? What factors are best to watch to determine the direction and intensity of a crude oil trend? Let’s take a look.

Risk Appetite Invites an Unpredictable Element to Price Action

As is the case for most growth-sensitive assets, crude oil’s general pace is the product of two distinct drivers: market-wide risk appetite and the prevailing balance of supply and demand. Investor sentiment is an exogenous catalyst that falls outside of the normal scope of the energy market. The flow of capital is a market-wide concern; and its motivations are unpredictable. A particularly influential and accessible economic release or general shift in the crowd’s mood can be equally influential for price action. It simply depends on the predisposition of the market at the time. But, why does something as subjective as risk appetite have such a prominent effect on price action? Through futures markets, the normal function of hedging unfavorable price fluctuations by commercial users is exacerbated by purely speculative motives. The inclusion of a speculative element in the market increases liquidity and price discovery; but it also exposes the commodity to a segment of the market that has no interest in dealing in the physical. What’s more, the rise of commodity-backed Exchange Traded Funds has further drawn in investor interest. Regardless of what particular reasoning for risk appetite to influence the asset, the impact of speculation can be seen through notable correlations. Below is a graph of the active crude futures contract (the grey line) and the Dow Jones Industrial Average (the orange line). Since the reversal from record highs for the latter, the relationship between the two has been distinct. However, the day-to-day volatility and swings between the two holds going much further back.

Despite its being a prominent driver, investor sentiment’s influence over oil can wax and wane depending on broader market conditions and the quality of risk trends themselves. If, for example, sentiment has leveled off or is progressing at a slow pace; it will invite a greater reaction to more tangible drivers (like supply-and-demand). On the other hand, this asset class is highly sensitivity to a change in optimism. Therefore, an otherwise lax correlation can suddenly return for a short period and disrupt a trend or spark a meaningful technical development.

Back to the Basics

Though risk appetite can often commandeer crude oil price action, the underlying trend is almost always influenced by the natural level of demand amongst commercial interests. The influence that such a driver has on price action is textbook economics. Consistent demand met with a reduction in supply makes the available oil more valuable. Alternatively, a constant level of supply that meets a sudden rise in demand will also increase the value of the existing inventory. However, while the theoretical balance is easy to identify, the influence behind equilibrium is oftentimes not so clear. For example, in the lead up to the record-breaking run in crude prices towards $150 per barrel in the summer of 2008, there was a notable drawdown on inventories in the US (the largest consumer of fuel in the world); but the decline was not unprecedented. More than likely, the advance was the combination of a strong global economy and an abundance of credit and investment capital. In the subsequent plunge that pulled the market down nearly 75 percent from its highs, the global economy fell into a recession (demand dried up) while supply held relatively constant. During these two periods, tolerance for risk and demand for energy would come hand-in-hand. This is often the case when it comes to the larger trends in the commodity market.

However, it is not always easy to gauge the longer bearings on demand or its influence on the market. On the other hand, regular reports on inventory change, demand forecasts and production figures from different regions of the world offer a very accessible driver to an otherwise vague concept. While there are different regional readings for this data, the most influential data comes from the largest producers and consumers (especially the United States and China for consumers and OPEC producers). For accessibility, there is no other reading that is as accurate or timely as the Department of Energy (DoE) Inventory figures for the US. This week-to-week reading of stockpiles for the world’s largest economy is frequently the impetus for substantial volatility; but not always. Depending on the market’s preexisting level of volatility and the interest in risk appetite trends; significant changes in inventory figures can lead to significant moves in the commodity itself. Below is a chart of the DoE’s Crude Oil Inventory report (in grey) and the industry-based American Petroleum Institute’s (API) reading of the same thing.

Over time, these two measures move in the same direction much of the time; but the weekly changes can differ substantially. Yet, there is very often little response to the API figures, while the DoE numbers receive far greater attention. Given the considerable correlation over time, the difference in market response to the readings is somewhat surprising and a source of potential exploitation.

Further keeping with the supply and demand picture, demand for crude does not typically come from the consumer. Oil is a raw material that is further refined into gasoline and heating oil – which are themselves heavily used by consumers and businesses. Therefore, the consumption of crude is heavily influenced by the changes in demand for the processed energy products. To illustrate this relationship, we can highlight the seasonality effect of the driving season in the United States. During the warmer months of the year and coinciding with a number of holidays, Americans generally travel more and in turn reduce the stocks of available gas reserves. To replenish the supplies, refiners require more crude to process. So, while gasoline inventories are not historically market moving on their own, they play a role in defining ‘pull-through’ demand for crude for a leading read for more market-friendly numbers. In the chart below, we see the DoE’s gasoline stockpile change (gray line) and API’s own reading of the same thing (orange line).

Altogether, trading oil from a fundamental approach is not as simple as economic theory would imply. However, being able to recognize the primary drivers for price action (sentiment trends and the true supply-and-demand balance) – and gauging which is the dominant catalyst for the market at any given time – can significantly clear the picture for a trader and put them back in tune with the market.

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Asian/Pacific Stocks Stumble as Earnings Miss Expectations, Nikkei Bucks Trend

Asia Session Key Developments

• Japan’s Corporate Service Price Extends 16 Month Decline
• New Zealand’s Economy Grows at the Fastest Pace in Two Years

Stocks in Asia/Pacific tipped lower as company earnings fell short of market expectations, while the Nikkei bucked the trend as firms within the region held an improved outlook for future growth. Nevertheless, the economic docket for New Zealand showed that the economy grew at the fastest pace in nearly two years during the fourth quarter of 2009 on the back of increased consumer spending, manufacturing and housing construction, while Japan’s annualized corporate service price index extended its 16 month decline, with the reading retreating 1.3% in February amid expectations for a 1.2% contraction. In Hong Kong, exports rose the most in five years on the back of increasing shipments to China, which lowered the trade deficit to HK$ 13.7B in February from HK$29.5B in the previous month. Moreover, Bank of Japan’s board member Kamezaki indicated that central bank is prepared to consider further monetary easing after last week’s expansion of its credit program as policy makers aim to balance the risks for the economy.

Nikkei 225                          10,828.85

Stocks in Japan extended yesterday’s advance, leading the Nikkei 225 to rally 13.82 points (0.13%) and close at 10,828.85. Four out of the ten components pushed higher on the day, with technology leading the way, advancing 1.24%, which was followed by a 0.77% gain in industrials. Shares of Nippon Express added 2.86% as the firm held an improved outlook for future sales, while Seven & I Holdings dived 2.48% as Japan’s convenience stores in February narrowed 2.0%. In addition, JTEKT pushed 3.39% higher as MF Global awarded the company a “buy” rating, while Toray Industries rallied 3.11% subsequent to the Nikkei newspaper stating that the company plans to raise prices of carbon fiber by as much as 15% starting in April.

Hang Seng                        20,778.55

The Hong Kong equity market pared yesterday’s advance, leading the benchmark equity index to dive 230.07 points (1.10%) and close at 20,778.55 as all nine components pushed lower on the day. Shares of PetroChina sank 1.45% following the company posting a 9.7% drop in full-year profit, while China Petroleum & Chemical retreated 1.42% on the back of lower energy prices. Moreover, Hung Lung Properties pushed 0.32% higher as the company, along with Sun Hun Kai Properties joins rival Cheung Kong in capping the number of homes for each buyer amid a fueling property market bubble, while Li & Fung plunged 10.66% as 2009 profits failed to meet market expectations.

S&P/ASX 200 Index           4,885.40

Shares in Australia pared yesterday’s advance, leading the S&P/ASX 200 to slip 6.10 points (0.12%) and close at 4,885.40. Half of the ten components retreated on the day, with industrials leading the way, shedding 0.90%, while telecommunications added 0.89% to taper the decline. Shares of Rio Tinto soared 1.84%, marking an 18-month high as investors shrugged off the guilty pleas this week by four executives at their trial in China, while Santos advanced 2.71% on speculation Woodside Petroleum would make a A$15B bid to take over the firm. At the same time, Energy World sky rocketed 56.52% following the announcement that Tokyo Gas will take a 25% stake in three of the company’s assets, while Stockland slumped 1.48% as Credit Suisse downgraded the company’s stock rating from “neutral” to “underperform.”

Notable Asian Session Event Risk / Economic Release

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