SCALE BACK EXPOSURE ON THE BOUNCE
CFD MARKET STRATEGIST, GFT
This is a big week for the markets with traders forced to consider the potential effects of a number of major events. Looking at the US, we get deeper into the second quarter earnings season with over 500 companies to report – up from less than 100 last week. The interpretation so far has been that earnings are beating the Street’s (low) expectations; revenues are proving a disappointment, while forward guidance has been less bullish than hoped. These come amid a slew of data which call the recovery into doubt. It is hardly surprising then that equities made a sharp retreat at the end of last week, especially as a number of major indices failed to break above significant resistance levels.
This week sees another round of US housing data, with building permits and housing starts today and existing home sales on Thursday. Last month’s numbers shocked the market and many investors concluded that without the stimulus of the tax credit, which expired in April, the housing market was on its knees. Foreclosures are on target to hit a record high this year and there are fears that a massive shadow inventory of repossessed homes will weigh down supply. Many analysts now feel a double-dip is a certainty.
Fed chairman Ben Bernanke testifies before the Senate Banking Committee on Wednesday and the House Financial Services Committee the following day. Both statements will be scrutinised carefully but the question and answer sessions may be of greatest interest. Last week’s FOMC minutes showed a remarkable deterioration in the members’ economic outlook. They were particularly concerned that the risk of deflation had grown, that unemployment was likely to remain high for a significant period and that the economy could take five or six years to return to normality.
Friday sees the release of the European stress test results. Given the confusion currently surrounding their terms and scope, it seems unlikely that Europe’s version will lift confidence in the way the US tests did. Consequently, traders may use any bounce in equities as an opportunity to scale back their long exposure.