As equities have officially entered bear market territory, according to the definition of 20% declines off the highs, the key is to distinguish between bear market rallies — a typical occurrence of down markets — and extended rebounds, which could mark the beginning of the end of the bear market. Our analysis suggests that the S&P 500 will have to gain more than 3% above its 50-day moving average (MA) in order to signal a credible message of rising momentum. The chart/table below shows that after having reached its record high in October 2007, the S&P 500 has shown six cases of failed rebounds. These rebounds are defined as failed attempts when the recoveries extend from under the 50-day MA (red line) but fail to exceed 3% beyond the average. Thus, regardless of the extent of the rebound from the low to the 50-day MA, the force of the rally is only deemed by the extent in which it crosses above the moving average. The 50-day MA is a widely followed medium-term trend indicator by market technicians.
Accordingly, we expect the S&P 500 to extend its current recovery above the 50-day MA up to the 1,380-5 level, which would denote a 2.7% to 2.9% rebound above the 50-day MA of 1,346-7. The 1,382 level also marks a key trendline resistance, which acts as a pressure point since Feb. 4. Once having failed to breach above 1,380-5, we expect to see a renewed pullback in the S&P 500 towards the 1,300, before extending losses to the 1,257 lows.
The fundamental rationale for this analysis is that markets have grown increasingly fixated on the “systemic risk” of the current crisis, namely, sharp declines in credit liquidity, bad news from banks and brokerages, coordinated central bank liquidity-boosting operations and hedge fund liquidations. Consequently, these systemic risk-related events have shadowed the emerging weakness on the macroeconomic front, such as rising jobless claims, falling housing starts/building permits and recessionary conditions from the regional and national manufacturing and services surveys (Philly/Richmond/Kansas fed indices, Chicago PMI and ISM surveys).
As the liquidity storm is calmed by the Fed’s liquidity exploits, market participants will tend to have a false sense of comfort, confounding the avoidance of disaster (preventing Bear Stearns bankruptcy) with notions that the “worst is behind us.” Whether further bouts of liquidity erosion are to occur or not, the next (unavoidable) negatives are likely to take place on the macroeconomic front, such as +5% unemployment rate, third consecutive monthly net decline in payrolls, negative readings in retail sales, personal consumption and industrial production. The fallout on the consumer will be particularly punishing as the combination of record high fuel prices, rising unemployment benefits, negative home equity and restricted access to credit play out.
Due at 8:30 am EST, Canada’s January retail sales are expected to have risen 0.9% from 0.6% while ex autos are seen up 0.5% following a 0.4% decline. The report will gauge expectations for next month’s Bank of Canada rate decision, which is expected to cut rates by 25 bps. More on the loonie below.
At 9 am is the S&P/Case Schiller home price index (composite 20) for January expected to have fallen 10.5% y/y following a 9.1% decline y/y in February. Falling home prices were a key factor in the 2.9% rebound in February existing home sales released on Monday. Prices fell 8.2% from 12 months earlier.
The 10 a.m. release of consumer confidence will be highly scrutinized after the February index tumbled by 12 points to 75.0, its lowest level since March 2003. Consensus forecasts place the March figure at 73.5, but the risk of a deeper decline is highly probably as the respondents faced record gasoline prices, tumbling home prices and a falling stock market, not to mention rising unemployment according to the latest jobless claims figures. Another increasingly important component of the consumer confidence index is the jobs perceptions index, which is the difference between the percentage of those reporting jobs to be “plentiful” and those reporting them to be “hard to get.” The index tumbled to -3.2% in February from 3.2%, its worst level in two years as negative perceptions prevailed.
Euro seen capped at $1.5600
Euro charted aggressive gains in the Asian session, from $1.5340 lows in the United States to as high as $1.5571, shrugging remarks from ECB Vice President Lucas Papademos describing recent currency movements as excessive. We reiterate that central banks are more likely to resort to verbal intervention than any operational selling of their currencies against the U.S. dollar as the fundamental picture does not warrant forceful moves by the central banks that have small chances of holding up against an increasingly confident speculative community.
The euro will surely be impacted by the barrage of U.S. economic data, but the more influencing report for the euro will be Wednesday’s release key IFO survey on German business sentiment. The February climate index rose to a three-month high of 104.1, posting its third consecutive monthly increase, while the situation index jumped to 110.3 from 107.9, regaining its November high. Just as the IFO survey’s strengthening has been persistently instrumental in boosting the euro to new highs, disappointing IFO releases have also proven to trigger sharp declines in the currency.
We expect the latest rebound to encounter medium resistance at $1.5590-95, but key pressure is seen at 1.5620. Another strong upside surprise in the IFO (above 104.2) is apt to lift the euro towards 1.5730.
Yen’s declines remain temporary
After a shaky start of the week, the yen was boosted across the board in Asia as trading desks were fully operational after the Easter Holiday break. The bulk of the gains in USD/JPY will remain dependent on the extent of recovery in U.S. equities. In the event that our aforementioned S&P 500 analysis materializes and the index follows through the 1,380sm then we may see further run up in USD/JPY towards the 100.90s, with resistance imposing at 101.35-40.
Acting BoJ governor Shiokawa delivered a set of yen-negative remarks indicating, which we deem as a way to fuel existing yen weakness, and offset any future surges of strength. Shiokawa cautioned against the negative repercussions of stock market moves on the real economy, while urging against big currency swings.
USD/CAD vulnerable towards 1.0060
The 8:30 a.m. release of Canada’s January retail sales will be instrumental in determining whether we’ll see a retreat towards parity in the USD/CAD, as sales are expected to have risen 0.9% from 0.6% while ex autos are seen up 0.5% following a 0.4% decline. In light of the recent robust readings in housing and employment, we may even see an upside surprise, that would drag the pair towards 1.0090, followed by 1.0060. The combination of prolonged gains in U.S. equities and strong sales is likely to accelerate CAD gains (USD losses) to as far as 1.0040. Upside seen capped at 1.0195.
Sterling tops out from CBI downgrade
Sterling shows some recovery after falling earlier across the board when the Confederation of British Industry, Britain’s top business lobby group downgraded its 2008-9 growth forecasts, stating that the credit crunch will continue well into 2009 despite easing from the Bank of England. The CBI said persistent market erosion and rising commodities will further dampen demand, forcing it to cut its growth forecast by 0.2 percentage points to 1.8% this year, falling within the government’s range of 1.75-2.25%. The CBI also downgraded its 2009 forecast to 1.7%. Even more problematic, its CPI forecast was raised to a peak of 3.2%. While it should be noted that the CBI often leans towards the side of policy dovishness in the interest of businesses, the current downgrade is a reflection of an overall deterioration in corporate and household sentiment.
Resistance is seen acting at $1.9960, which we expect to be prolonged unless excessive disappointment emerges from the US data. Subsequent resistance stands at 1.9995-05. We expect support to hold at 1.9880, backed by 1.9840.
EUR/GBP seen supported at 0.7780, which is expected to give rise to a boost onto 0.7810 and 0.7825.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
