Friday, September 13, 2013

Market Week Wrap-up

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                           Go here to read the Course description and purchase:                Weekly Market Update: Syria Attack Off the Table, Taper On Deck

- Global equity markets sustained another round of solid gains this week. The march to war in Syria abruptly gave way to diplomacy as Russian President Putin offered to broker a deal to get the Syrians to hand over their chemical weapons to international control. Market participants appear to be more comfortable with the idea that the Fed taper, with the initial reduction on deck for next week, will be gradual (and inevitable). Chinese August trade data out on Monday was very strong, suggesting that there has been no big slowdown in China. US initial jobless claims dropped to 292K in the week ended September 7th, the lowest figure since 2006, however the data was clouded by some technical problems in claims processing in two states. For the week, the DJIA gained 3%, the S&P500 added 2% and the Nasdaq rose 1.7%.

- The FOMC meets next week on Wednesday, Sept 18th, and the consensus view is that the Fed will decide for "taper light" of $10-15B (to $70-75B in purchases a month), with most if not all the reduction in USTs, not mortgage-backed securities. On Friday the Nikkei published a story asserting that President Obama would nominate Larry Summers as the next Fed chairman after next week's FOMC meeting. The White House later refuted the report, and sources said that there would be no announcement about the new chairman next week.

- By Monday, there was no chance of the House passing a resolution supporting the use of force in Syria and Senate passage was looking tenuous. With options vanishing quickly, the Obama Administration rapidly embraced Russian President Putin's offer to broker a solution to the chemical weapons issue, with some hesitation. Despite the move from bombs to diplomacy, the prospects for successfully extracting the Assad regime's weapons are poor, at best. US and Russian negotiators have been haggling over the details of an eventual deal, and the US has resisted Russian demands to take use of force off the table as an option. As concerns about an imminent military strike faded, so did crude. After peaking last week above $110, WTI crude fell to around $107 later in the week.

- The response to Apple's new smartphone models has not been a vote of confidence. After holding steady around $500 in the three weeks leading up to the announcement this week, shares of Apple have dropped approximately 8% to trade below $470. Apple launched two separate models for the first time: the high-end iPhone 5S and the more moderately priced iPhone 5C. Analysts dismissed the former for only offering incremental improvements over the iPhone 5 and the latter for being too expensive to appeal to its target markets in emerging economy nations. In addition, a widely expected deal between Apple and China's largest mobile provider, China Mobile (with 700M customers), has not closed yet.

- Dow Jones is making its first change to the DJIA in a year and some long-standing members are getting dropped. Alcoa is leaving the index after 54 years, in addition Bank of America and Hewlett-Packard. In their place, Goldman Sachs, Nike and Visa are being added to the Dow 30. Analysts point out that the swap of Goldman for BoA will have an outsized impact on the price-weighted index: at $169 a share, a 1% move in GS would add approximately 12 points to the DJIA, whereas a 1% move in BAC, priced at $14.50, only adds 1 point to the index. The changes are effective Sept 23rd.

- On Thursday, the Obama Administrations circulated its latest plan to curb CO2 emissions from power plants. The EPA proposal would limit emissions to 1,100 lbs of CO2 per megawatt hour for coal plants and 1,000 lbs for large gas-fired plants. These restrictions would effectively deter any construction of new coal-fired plants and are a stepping-stone for the Administration's forthcoming emissions standards for existing power plants, which are due in June 2014.

- Verizon sold $49B in bonds this week, comprising the largest corporate bond offer in history. Initially Verizon was looking to sell $20B in paper to fund the buy-out of its Verizon Wireless JV partner, Vodafone Group. But sustained demand for the debt deal - sources suggested the book rose above $90B - saw the company more than double the offering. The huge interest in the sale suggests investors are hunting for yield ahead of the Fed's big moment next week.

- The Shanghai Composite pushed out to its best levels in three months this week following an impressive recovery in August trade data. Meanwhile, August CPI fell to three-month lows, with the 2.6% annualized figure low enough to let Beijing leave its accommodative policies in place. After the trade data, the China NDRC estimated that 2013 Chinese imports would be up 7.3% y/y and exports up 9% y/y. At the same time, there were signs the government has still not managed to bring the real estate situation to heel. There were reports in Chinese media that both big, state-owned banks and smaller banks had temporarily halted issuing mortgages in Shanghai, Beijing, Guangzhou and Shenzhen, as well as some second- and third-tier cities.

- At the end of last week, dollar strength and Draghi's comments at the post-decision press conference had weighed on the euro. EUR/USD entered the week around 1.3170 and then rose a big figure in Monday trading. EUR/USD then bounced between 1.3250 and 1.3320 for the rest of the week. GBP/USD pushed out to seven-month highs above 1.5870 as the string of better UK economic data continued. Note that the UK August Jobless Claims fell for the 10th straight month, with the good data also reflected in the gradual climb in short-dated Gilt yields. Many analysts now believe the BoE might start tightening before the first half of 2015.

- The chart of USD/JPY this week looked much like last week's, but a little softer. The pair spent the mid-week period above 100 but then bounced lower as numerous Japanese officials said PM Abe had ordered the formulation of a new economic package by the end of September to help offset the planned sales tax hike. Tokyo won the nod to host the 2020 Olympics, which Abe has taken to calling the fourth arrow of his economic stimulus plan.