Wakeup Call: Signs Of Risk-Aversion Re-Entering The Market

Fixed Income in strong rally. CHF and JPY strengthening. Stocks Uninspiring. Crude Oil towards $125.

Overnight News Bullets

• SZ Unemployment Rate (Apr) out at 2.6% vs. 2.5% expected.
• SW Industrial Production MoM/YoY (Mar) out at -0.1%/0.8% vs. -0.3%/1.9% expected.
• SW Industrial Orders MoM/YoY (Mar) out at 6.9%/-9.5% vs. -3.5%/1.6% prior.
• NO Industrial Production MoM/YoY (Mar) out at 1.4%/4.0% vs. 0.4%/0.3% expected.
• NO Ind. Prod. Manufacturing MoM/YoY (Mar) out at -2.0%/-0.4% vs. 0.0%/2.3% expected.
• GE Industrial Production MoM/YoY (Mar) out at -0.5%/4.7% vs. -0.5%/4.8% expected.
• UK BoE Rate Announcement out at 5.00% (unchanged) as expected.
• E-Z ECB Rate Announcement out at 4.00% (unchanged) as expected.
• CA Housing Starts (Apr) out at 213.9K vs. 225.0K expected.
• US Initial Jobless Claims out at 365K vs. 370K expected.
• US Continuing Claims out at 3020K as expected.
• US Wholesale Inventories (Mar) out at -0.1% vs. 0.5% expected.
• US EIA Natural Gas Storage out at 65 vs. 62 expected.
• US ICSC Chain Store Sales YoY (Apr) out at 3.6% vs. -0.5% prior.

Markets

• FX: USD slightly weaker. JPY and CHF strengthening a lot.
• Fixed income: Noteworthy rally in all sovereign fixed income.
• Stocks: Europe mixed, US slightly higher. Nikkei down 1.78%.
• Commodities: Crude Oil still going higher, despite big DOE build on Wednesday. Precious metals both higher.

O/N Data Heat map:

Calendar

Today's Highlights:

This and Next Week's Highlights:

What's going on?

• Crude oil has seen yet another record high at $124.70 on speculation diesel and gasoline may prove to be insufficient to meet demand levels during the summer driving season. We are looking crude to test $125 in today's trading.
• After effects of Myanmar cyclone on rice prices have been coupled by Philippines and Nigeria, two of the world's largest importers, seeking new shipments, pushing for a 6 consecutive days of price appreciation.
• Yen is headed for biggest weekly gain in 3 month period against euro as continued decline in Asian stocks has punished the carry trades.
  In his post rate decision remarks, ECB President Trichet said the inflation would remain high for some time, signaling to markets that the bank was in no rush to lower rates despite slowing growth.
  

FX

GBPUSD to resume downtrend?

FX Trading Strategies

Equities

Merck Right Back In The Down Trend!

• We expect the European markets to open -0,4% lower today. The US indices were flat after closing in Europe, but the S&P500 future is down by -0,6%. One of the main driver are the figures of AIG after closing. They mentioned that they need to raise $12,5 billion new capital due to the subprime write downs. Crude oil still gains over night to $124,3. We would like to short the airlines and especially the low cost carriers. Fuel prices are a big part of their cost base and they have not hedged all their fuel consumption. We recommend to short EasyJet and our favorite Ryanair. Watch out for Q1 reporting of Gas Natural, Pirelli, Linde, Allianz.
• Trading Strategy: (Sell - Merck KGaA - MRCG:xetr): The rally in the German pharmaceutical company is coming to an end, we feel the rally is overdone and the technical picture suggest a new wave down. There is no fundamental case for this trade and should be seen as a purely technical trend trade. We look to sell towards 89.50 with a stop above 93.50 initially targeting 78.00.

Equity Index Levels

Futures

WTI Crude Oil: Near our $125 target.

• Sell Crude Oil (clm8) @ $125.20/70 area with a stop above $126.20, target $122 area. Yesterday was another impressive rally for Oil, with more than 10% gains during the week! No special news sent crude higher but funds money building on the momentum.
• Last US Inventories where showing a big crude Oil build and a technical draw on distillates. For the latter, refineries are lowering their production because of low margins, but the market is just ignoring the facts. We firmly believe it will correct sharply soon.

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