CREDIT SUISSE: Reversed Long EUR/USD Into Short At 1.3300

Credit Suisse booked profit on its long EUR/USD from 1.3035 by reversing into short at 1.3300, with a stop at 1.3435.

"EUR/USD has again managed to find support at minor trendline support, which keeps the immediate bias still higher," CS says.

"With the 1.3418 June peak not far above, and with momentum now beginning to deteriorate, we look for a cap here, and a turn lower in the range. Below 1.3234 looks to 1.3166, and through here would see a near-term top, and a more extended turn lower to 1.3093/82," CS adds as a rationale behind this call.

Read More :http://www.efxnews.com/story/19990/credit-suisse-reversed-long-eurusd-short-13300

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For The First Time In Ages, European Unemployment Actually Falls

Unemployment in Europe is still in nosebleed territories, but for the first time in ages it didn't get worse in the month of June.

In the Eurozone, unemployment was stable at 12.1% (slightly beating expectations) and for the EU there was actually a dip to 10.9% from 11.0%.

Here's chart showing improvement on the EU line for the first time in year.

Read more: http://www.businessinsider.com/for-the-first-time-in-ages-european-unemployment-actually-falls-2013-7#ixzz2ac3NWH6N

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BARCLAYS: Ahead Of FOMC & ECB, Sold EUR/USD Targeting 1.28

"The meetings for the FOMC, ECB and BoE this week will be particularly important in defining the near-term paths of the respective currencies. While their overall outcomes may be mixed, we believe the balance of risks lies in favour of establishing short EUR/USD positions once again and yesterday they did as such. FX reaction functions have changed… The July meetings for the ECB and BoE surprised FX markets by formally (ECB) or de facto (BoE) revealing forward guidance frameworks. We argued that these events have changed the EUR and GBP reaction functions to moves in rates and the currencies will be more sensitive to these movements...While forward guidance has worked against the USD in the past month, we think it is unwise to position against it working for GBP and EUR over the coming weeks. Forward guidance is in its infancy relative to the US but we expect it to put a cap on the respective currencies versus the USD as the short-end of the yield curves start to diverge. In light of this, we have entered a short EUR/USD trade (target 1.28, stop 1.3430, spot ref. 1.3266) but would rather wait until the 7 August QIR before looking at GBP downside again." 

Chris Walker, FX strategist at Barclays Capital.

Read More: http://www.efxnews.com/story/19984/exclusive-ahead-fomc-ecb-barclays-sold-eurusd-targeting-128



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CITI - FOMC Over/Under

The FOMC statement this week will be under much closer scrutiny than would have been expected a week ago. In this regard, Citibank outlines the following dovish/hawkish risks in the FOMC statement on Wednesday:

Risks on the dovish side (from most to least): 1. Indication that the tapering timetable has changed 2. An explicit drop in the threshold unemployment rate 3. An explicit Inflation floor 4. Concern that economic activity is not meeting expectations5. Indication that government bond yields are still too high given the likely path of Fed policy

Risks on the hawkish Fed (from most hawkish to least): 1. Explicit reference to the tapering timetable 2. Little or no material change from the last statement 3. Reference to financial market froth 4. More optimistic language on labor market than in last statement – “Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months …The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”

Given that, what is Citi's base case for this coming FOMC statement?

"Our economists do not expect much change in direction from the last FOMC and subsequent guidance so there is a risk that expectations will be disappointed. On the whole we think that the Fed has given all the signals it is likely to give, so the risk is weighted small towards the Statement being a bit of a damp squib," Citi answers.

And how the USD will likely react to such an FOMC outcome?

"For FX we see USD as trading neutral to slightly stronger. There may be modest disappointment that the run-up of dovish comments to FOMC was better than the reality, but we see little motivation for either extreme hawkishness or dovishness," Citi projects. 

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If You're Wondering What's Wrong With America, Look At These Four Charts

Five years after the start of the financial crisis, the U.S. economy is still struggling.

Unemployment is above 7%.

Growth is weak.

Most consumers are broke.

Meanwhile, the stock market is hitting record highs, and corporations are printing money.

If you're wondering what's going on here--why these two seemingly contradictory things are happening--we have four charts for you.

They go a long way to explaining why our economy is the way it is--why a handful of Americans are getting ever richer while everyone else is getting crushed.

(The answer is that our 30-year obsession with "efficiency" and "return on capital" has produced a culture that believes that companies only exist to make money for their owners, instead of also serving their other critical stakeholders--customers and employees. But we'll let the charts speak for themselves.) 

CHART ONE: Corporate profits and profit margins are at all-time high. American companies are making more money and more per dollar of sales than they ever have before. Full stop.

 

Business Insider, St. Louis Fed

(Remarkably, some people are still saying that the problem with our economy is that companies are suffering from "too much regulation" and "too many taxes." Maybe little companies are, but big ones certainly aren't. What they're suffering from is a myopic obsession with short-term profits at the expense of long-term investment and value creation).

CHART TWO: Wages as a percent of the economy are at all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" represent spending power for American consumers. And American consumer spending is "revenue" for other companies. So our profit maximization obsession is actually starving the rest of the economy of revenue growth.

 

Business Insider, St. Louis Fed

CHART THREE: Fewer Americans are employed than at any time in the past three decades. Another reason corporations are so profitable is that they don't employ as many Americans as they used to. This is in part because companies today regard employees as "costs" and "inputs" instead of human beings who are dedicating their lives to an organization that is supporting them and their families. As a result of frantic firing in the name of "efficiency" and "competitiveness" and "return on capital," the U.S. employment-to-population ratio has collapsed. We're back at 1970s-1980s levels now.

Business Insider, St. Louis Fed

CHART FOUR: The share of our national income that is going to the people who do the work  ("labor") is at an all-time low.  The rest of the income, naturally, is going to owners ("capital"), who have it better today than they have ever had it before.

 

Business Insider, St. Louis Fed, Bureau of Labor Statistics

In short, the religion of "maximizing profits" that has developed over the past 30 years has created a business culture in which executives dance to the tune of short-term traders and quarterly financial reports, instead of investing aggressively on behalf of employees, customers, and long-term owners.

That's not what has made America a great country. It's also not what most people think America is supposed to be about. And it will only lead to more problems for most Americans going forward.

So it's probably time to rethink our current business philosophy.

We might want to make the goal of our corporations be to create long-term value for all of their constituencies (customers, employees, and shareholders), not just short-term profit for their shareholders.

Read more: http://www.businessinsider.com/profits-high-wages-low-7-2013#ixzz2aXqbjuET

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Why It’s So Risky To Be Long USD/JPY At The Moment

Today is a preamble to a week that features a swath of top-tier data but one thing stands out — the declines in yen crosses, especially USD/JPY. Last week, USD/JPY was the worst performer and under normal conditions, you might see a bounce on a day like today. But USD/JPY isn’t normal. Why? Because speculators are heavily long the pair.

The market is very short USD/JPY, despite recent declines.

Unless the news and Fed unambiguously point to tapering, there is growing risk of a squeeze lower. This doesn’t look like a chart you want to fight, at least not until close to 95.00.

That said, the theme this week will be going with the data. The market is uncertain and the news will decide where it goes.

Read more: http://www.forexlive.com/blog/2013/07/29/why-its-so-risky-to-be-long-usdjpy-at-the-moment/

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Bernanke Is Definitely Going To Taper Soon, And It Has 'Nothing' To Do With The Economy

 

This is an interesting note from Credit analyst Harley Bassman at Credit Suisse, who argues that Ben Bernanke is guaranteed to "taper" soon (meaning, reduce the pace of the Fed's monthly bond purchases) and that it has nothing to do with economic reality.

 1) The announcement of "taper" has NOTHING to do with the economy, it has everything to do with Mr. Bernanke's legacy.  This was his "irrational exuberance" speech to deflate the asset bubble the FED has so assiduously inflated.  By stopping out the over-levered trader's who were trying to monetize the "Bernanke put", the FED has mitigated a 1994 or 1998 or 2007 scenario (the last times that gamma vols sunk below 80).  Mr. Bernanke does not want a Greenspan redux where a financial calamity occurs soon after his departure and he takes the blame. 

2) There is a huge Political component.  Mr. Bernanke is the only person who can start the taper process and keep his hands clean.  If the job falls to the next FED Chairperson, it will be met with a cacophony of second guessers (think Krugman).  By doing the dirty job himself, he provides a clean slate to his successor.

He also argues that there's an economic stability angle, as the Fed will soon be too much of an owner of U.S. debt.

Read more: http://www.businessinsider.com/bassman-on-why-the-fed-will-taper-soon-2013-7#ixzz2aT9HOwWd

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S&P: A True Recovery Appears 'A Long Way Off' For Eurozone

Rating agency Standard & Poor's Monday offered up a downbeat outlook for the Eurozone, warning that while the monetary union will exit its recession next year, festering and as-yet-unaddressed problems will mean a sustained recovery in the Euro Area "appears a long way off."

In a report articulating the view of its Credit Conditions Committee, S&P also said it sees the Federal Reserve not reducing the pace of its asset purchases until December, and cautioned that slower Chinese growth could spill over and negatively impact already weak European economies.

"Europe continues to be the weakest link for global credit conditions," S&P said in the opening line of the report, "with the Eurozone recession and sovereign-banking crisis the key risks."

The firm said it expects "a feeble return" to growth in the Eurozone next year, but that "a true recovery appears a long way off."

"Monetary and financial conditions remain highly fragmented, with no end in sight to banks' dependence on sovereigns," S&P said. "As time goes by, a persistent lack of vision on how to tackle growth, especially on the periphery of Europe, and the widespread debt overhang in large parts of Europe remain our biggest worries."

Taking a wider view of the global economy, S&P said its still sees as top risks to global credit conditions a deeper and prolonged Eurozone slump, U.S. fiscal policy developments, a further growth pullback in China and a disorderly exit from quantitative easing.

S&P now forecasts the Federal Reserve to begin tapering its $85 billion a month in asset purchases in December. Its previous expectation had been for tapering to being in early 2014.

"Yet, we continue to be relatively positive on the U.S. economy and expect a gain in momentum through next year," S&P said.

As mentioned above, S&P views a less-than-smooth end to the bond buying as an important risk, because of the potentially negative market reactions that could follow it.

"The Federal Reserve's return to more normal monetary policy, even under orderly circumstances, could still weigh on credit conditions because the shift could lead to higher borrowing costs for consumers and businesses, weaker collateral performance, and losses for financial institutions," it said.

The agency said the Credit Conditions Committee believes "a shock or uncertainty" from U.S. fiscal policy is increasing. It warned that the longer the deep, automatic budget cuts known as sequestration remain in place, the more difficult it will be for the private sector to sustain growth.

In addition, the continuing resolution is set to expire in September - with no agreement in sight on FY'14 spending - and the government will likely "breach the debt ceiling in the early fall." The report went on, "There is scant evidence of Congress coming to an agreement at this point, and contentious negotiations could harm business investment and consumer spending," S&P said.

As for the world's second largest economy, S&P said there are some concerns over the recent performance of China, and it has reduced growth expectations as a result. "Although we had already anticipated that the Chinese economy would experience slower growth and still consider it to be healthy, we believe it could spill over to affect the already weak European economies," it said.

In addition, S&P said the risk of a correction in China "is increasing" as the government seeks to boost domestic demand and shift away from a reliance on investment.

"The challenge lies upon expanding consumption sufficiently to counter a slowdown in investment," S&P said. Concerns are also rising regarding the credit boom and frothy real estate market, it added.

Overall, S&P said it expects growth in Asia to be a bit softer. Regarding Japan in particular and the aggressive drive by authorities to tackle entrenched deflation, S&P said "the recent reflation policy in Japan is gaining traction, but progress on structural reform needs to accompany it."

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CREDIT AGRICOLE: EUR/USD To Test 1.34 Mid-Week Then Go Bust

Expecting no meaningful changes to the ECB’s introductory statement, EUR direction should be largely driven by US events this week.

One exception relates to possible comments to be received during the Draghi Q&A regarding forward guidance. Investors appear to be expecting the governor to deliver greater details regarding forward guidance policy than at his June policy statement. As such, another failure to provide greater policy clarity could lift short-term rates raising EUR further.

Moreover an additional upside risk for EUR surrounds a possible widening of the USD/CNY trading band last weekend. Previously, CNY band widening has lead to EUR demand via PBoC recycling of USD into EUR (and other currencies) as a result of portfolio rebalancing. If occurring, this widening could produce an additional source of EUR support this week. 

The outlook for USD this week, will be dominated by the ongoing conflict between US economic data and Fed policy rhetoric. Driving this shift will be Q2 GDP, revisions to GDP, employment and ISM collectively pointing to improving US growth. Indeed as the US economic recovery gains momentum, persistently dovish Fed policy rhetoric ultimately risks losing some of its credibility. The result of this conflict should therefore be a further USD weakening ahead of the Fed, followed by renewed USD strength as labour data lead the currency higher.

We look for EUR/USD to test 1.34 midweek before reversing lower.

Read More: http://www.efxnews.com/story/19944/eurusd-test-134-mid-week-then-go-bust-credit-agricole

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People Are Using Borrowed Money To Buy Stock Like It's 2007 And 1999

Deutsche Bank has a monster note out on margin debt that has been making the rounds.  The conclusion of the note is rather simple – today’s euphoric borrowing on margin to buy stocks is reminiscent of past bubbly equity market periods (see here for more).  The note reviews commentary from the 1999 & 2007 periods and compares it to what’s being said today.  They found some eerie similarities:

We prepared a collection of press articles which were published around the key events during the past financial crises as displayed in Figure 2 on page 2 above. Our key finding is straight forward. Irrespective of the publishing date, the articles read alike throughout the two major crisis periods, i.e. the “new technologies market equity bubble” (1999-00) and the “Great/Global Financial Crisis” (2007-08) (see Figure 6 on page 5 and Figure 7 on page 6). Most interestingly, litrally the same content can be found in todays’ press as displayed in Figure 8 on page 7). Universal phrases include:

“A rising stock market encouraged more investors to go into debt to buy stocks, sending margin debt levels past their all-time high”.

“The National Association of Securities Dealers (NASD) has asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunch.”

“The Fed is concerned about a sharp rise in margin debt but has been unwilling to attack stock market speculation as high levels of leverage do not necessarily translate into high risk. The last time the Fed adjusted the margin rules was in 1974, when when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.” […] “The Fed should return to its pre-1974 policy of actively changing margin requirements in response to stock market speculation”.

“High margin debts show the effect of over-leveraging and mispricing of risk”.

“The movements in stocks cause brokerages to stop allowing customers to buy some of the volatile stocks on margin or require clients to put up more cash.”

“Either the market rises dramatically to make those loans good or in any down move there is tremendous selling pressure”.

“Until recently, most investors ignored red flags raised by regulators”.

Why is margin debt dangerous?  

Leverage is dangerous for many reasons, but the dangers of an excessively levered market are really rather simple to understand.  As DB says, it creates an environment that can lead to a disorderly unwinding of excessive risk:

“Margin debt can be described as a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. These loans are collateralized by stock holdings, so when the market goes south, investors are either required to inject more cash/assets or become forced to sell immediately to pay off their loans – sometimes leading to mass pullouts or crashes.”

Margin debt creates the sort of unstable environment that makes a snowball effect much more likely than it would be in an environment without margin debt.  If you recall 2008 you likely remember hearing about how many fund managers were “forced liquidators” of portfolios.  That was, in large part, due to the excessive leverage.

But there’s a double whammy effect with leverage.  Not only are the regulators likely to force you out of positions that go heavily against you, but from a psychological perspective it creates a much more fragile environment.  If you’ve ever been short a stock you know what I mean.  It’s one thing to own the stock outright in a long position.  It’s a whole different mentality to borrow a position knowing that you’re PAYING to own the position.  That creates a finite trading period and a sense of uneasiness that makes a levered trade much more different than outright ownership.  Being on leverage is kind of like a teenager who borrows his/her mother’s car versus driving his/her own car. You don’t want to crash your own car, but you really don’t want to crash your mother’s car (because it’s not yours, there’s more on the line!).

All of this is interesting not only from the perspective of the investment world, but also from the perspective of the monetary system.  I sincerely believe that this environment is due, in large part, to the Bernanke Put and the idea that you “can’t lose” by owning risk assets because the Fed will put a floor under the markets no matter what.  This borrowing to own more stocks is a case of what is called a disaggregation of credit.  It is, in essence, an unproductive use of credit that provides no real benefit to the real economy, but potentially adds a destabilizing element that rewards gamblers and no one else.  As I’ve explained before, this is the element of QE that I simply despise.  As a market practioner I know, for a fact, that this mentality influences price action and has the potential to both help (on the upside) and hurt (on the downside) the economy.  I see no need to encourage such behavior and I think that’s what the Fed is doing via QE.  I think it’s irresponsible and very poor risk management – something that all banks, even central banks, could improve upon.

So, are we in a 2007 or 2000 type environment?  Yes.  I would say we are given that the data is confirming the same sort of market trends and debt trends.  But the question is what’s the trigger?  The market is kind of like a Jenga set at this stage in the cycle.  Everyone knows it can probably be toppled by the wrong move.  But that move might not come this year, nexy year or in the next few years.  As Keynes said, “Markets can remain irrational a lot longer than you and I can remain solvent.”

Read more: http://pragcap.com/de-ja-vu-on-margin-debt-2013-repeats-1999-2007#ixzz2aQJNgqxb

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