SaxoBank Market Review

Morning Review

Daily Trading Strategies

Daily Report Sep. 08 2010

By Saxo Bank

Greece was a one-off. Not likely.

What's going on?

We expect European markets to open around 0.5 % lower this morning on the back of renewed fear for the development in European sovereign debt. This reoccurring theme has been put to life again after an article in Wall Street Journal yesterday, but the interesting part it really that the article contain no new information. We have been sceptical all along on the result of the stress test and aired this opinion. And indeed the hard evidence delivered at that time by Goldman Sachs said that 39 out of the 91 investigated financial institutions should have failed in the stress test instead of just seven. Whenever the sovereign debt crisis rears its ugly head risk swiftly sells off, and we don’t blame the market. The stress tests – as we have mentioned again and again – are completely useless and given our below consensus expectations for the Eurozone it’s only a matter of time before things turn serious enough that a couple of ‘better than expected’ US macro reports cannot help anymore.

Market musings

German factory orders weren’t impressive yesterday as they declined 2.2% MoM in July. Was that it for the German recovery or just a minor blip in the road? While we don’t think the German locomotive has lost all its steam yet, it cannot continue to pull the Eurozone economy all by itself. Remember, the Eurozone is Germany’s largest export market and no gains from EUR depreciation are helping German exporters inside the zone. Instead, consumers in other Eurozone countries must pick up the tap, which is difficult when they struggle with a combination of austerity measures and high unemployment and debt levels.Today we are treated to another German number, namely industrial production, which is expected to increase 1% MoM according to consensus. Factory orders generally leads production by 2-4 months, so judging by yesterday’s disappointing factory orders report, the pace of production growth should slow in the coming months.

Bank of Canada is expected to raise its headline rate by 25bps to 1.00% according to consensus following yet another month with mostly good economic reports. Analysts are not unanimously looking for a hile though with one-in-four analysts instead expecting unchanged rates. Building permits, releases at the same time as the BoC rate is announced, are expected to decline, but they are generally very volatile MoM.

Japan reported a bunch of data in overnight trading and the JPY is up roughly 0.5% against the USD. The JPY599.6bn auction in 30-year bonds for an average yield of 1.991% only added to the positive JPY sentiment. Machine orders grew 8.8% in July and the trade balance also improved, both positives for GDP in the current quarter. Given the strong JPY in recent quarters the trade balance numbers are encouraging though that didn’t stop Finance Minister Noda from once again complaining about the strength of the Yen.

Equities

Equities and in more general terms risk sold off yesterday as a renewed highlight on the European financial sector and the lack of actual test in the recently published stress test resurfaced. In yesterdays US market we had a close just below the psychological important level of 1100, but the sell-off was not that forceful that it causes reason for concern. We still believe in a test of the 1130-level before anything else.

The article in yesterday’s Wall Street Journal contained no news and unless further information is revealed this theme will soon die out. In September around 80 bln EUR sovereign debt is to be auctioned and if one of these auctions does not play out well the theme will gain new life and the sell-off in risk could be rather substantial. But for today and most likely tomorrow look out for the financial sector as this is the one sector within the equity universe that is going to be hit the most – especially banks that in Goldman Sachs test was pointed at as one of the 39 that did not pass the test.

Asian stocks sold off overnight not as a direct cause of the European sovereign debt issue, but on fear of the outlook for growth in Japan with a stronger JPY. However when the flight to safety mode is turned off after the European sovereign theme is replaced by another the JPY will most likely drop again, the concern on the outlook for growth in Japan will be less and Asian stock markets will follow the rest of the world’s stock markets higher.