The impact of Fed Chairman Greenspan’s warning of a "dramatic contraction” in Chinese equities extends onto Asian stocks, dragging indexes for the first time in four days in Thursday’s trade, after causing a reversal in U.S. stocks’ intraday Wednesday rally. While Greenspan’s warning on Chinese equities does not necessarily stand out in the midst of a series of warnings from Chinese regulators and central bankers, the negative impact of Greenspan’s comments on U.S. equities is a fundamental catalyst to a lingering negative development on technical grounds.
Warnings over the past two days about a deterioration in the price behavior of the Dow Jones Industrial Average and the S&P 500, whereby the daily closings below the intra day highs reflect not only the lack of conviction by the bulls, but a gradual dominance from the bears. In fact, open interest in net-short positions in the New York Stock Exchange hits a record high in the month ending in May 15, rising 7% to 11,761,191,254 shares from 10,989,496,813 shares in mid-April. The charts below illustrate the failure for prices to close at their intraday highs this week.
The 4 am EST release of Germany’s May IFO survey is expected to show the business climate index rising to a record high of 108.9 from 108.6 and the current index at 113.5 from 113.2. Recall that the April IFO, released a month ago, sent the euro rallying towards record territory as a result of the business climate index rising to 108.6 from 107.7 in March, exceeding median estimates of 107.9, and falling just 0.1 point short of the 15-year high reached in December. The current business situations index conditions rose to 113.2 from 113.4, overshooting forecasts of 112.6, while the expectations index rose to 104.3 from 103.2.
At 8:30 am, U.S. April durable goods are expected to show 1.0% rise following a 4.3% increase. The highly scrutinized ex-defense items is expected to have slowed to +1.2% from 4.8%.
Also at 8:30 am is the weekly jobless claims release seen up at 300,000 from 293,000, which would confirm the bullish picture in the last three weekly releases.
The 10 am release of U.S. April new home sales expected to have barely changed at 860 million from 858 million in March. A decline to less than 850 million would intensify the recent return of fears in the U.S. housing sector, particularly last week’s dismal home market index and building permits.
Euro awaits IFO, burdened by rising expectations Euro’s Wednesday rebound was limited to no more than 1.35 before retreating to the 1.3450s We expect the pair to extend gains to as high as 1.3520s in the event of a neutral to strong IFO survey. A figure at or higher than 109 could potentially push the pair towards the 1.3530s, while disappointing U.S. figures may extend the rally to as high as 1.365-70. But the fact that the survey has exceeded expectations over the past three monthly releases is raising the bar of expectations and sets up more room for disappointment.
The chart below shows the pair supported at 1.3440 and backed by 1.3370 in the event of IFO disappointment. The interim resistance of 1.35 is apt to be visited at the IFO release, but there are two other key data items from the United States allowing for a chance to test the 1.3530s. An IFO figure below 108.6 may not be effective in supporting the pair above 1.35 as France’s May business indicator slipped to 109 from a revised 112.
Sterling seeks $1.99 in case of weak U.S. figures Sterling’s changing fortunes resulting from the hawkish Bank of England minutes could extend towards the 1.99 and 1.9930 territories in the event that the U.S. triple data release leans on the weaker side. We may see a brief retreat in cable in case of a weak IFO, but a strong index could be especially positive for GBP/USD.
Interim resistance at 1.9905—the 50% retracement of the 2.0135-1.967 decline. Subsequent upside target stands at 1.993, with key pressure point stands at 1.9957—the 61.8% retracement and the 5-week trend line resistance. Support starts at 1.9830, backed by 1.9785.
Yen turns to IFO , U.S. data for risk appetite
Comments from Japanese cabinet officials indicating lack of support for a rate hike maintained downside pressure on the yen. But post Greenspan comments, cautiousness has diminished the fuel from carry trades. The retreat in Asian equities proved relatively modest, albeit the first in four days. A disappointing IFO figure could cast doubt on the continuity of the German recovery and trigger selling in euro stocks, at which point will further weigh on global risk appetite. A drop below 121.30 is seen extending selling towards 120.75-80, which is near the 38% retracement of the 119.44-121.60 move. Upside still capped at 121.75
NZD/USD bearish ahead of possible carry trade unwinding We state our bearish stance on the New Zealand dollar ahead of escalating risks for a downturn in global equities. The fact that a decline could easily be triggered from China, warnings of overvalued levels, Europe, weak IFO, or the United States, weak homes sales and durable goods, increases the likelihood of a retreat in risk appetite and hence, a decline in NZD against USD, JPY and EUR. Remarkably, the bearish outlook also remains valid in the case of U.S. data upside. Interim target stands at 0.7250 and 0.7220. Stops seen 0.7320.
Ashraf LaidiChief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY
(212) 644-4220a.laidi@cmcmarkets.com
