May 9, 2014 - Issue #736

In This Issue

1. May-June 2014 Outlook: From Russia with Love
2. Hot Market Report: US Dollar Index
3. Economic Calendar

1. TTN May-June 2014 Outlook: From Russia with Love

From our friend www.TradeTheNews.com

The early part of the year has been spent digesting the outsized market moves of 2013. Equity , currency and commodity markets have mostly moved sideways, held up by slowly improving global economic data, but capped by seasonal weakness and harsh winter weather in the US, as well as headline risk from the Ukraine crisis. 

Russia's annexation of the Crimea was this year's first big surprise event, and markets are still considering how to treat the situation. As Russian President Putin decides whether to further exert his influence on his neighbors, pundits are guessing at how far he will go and how much economic damage resulting sanctions will cause. So far markets have been quite stable other than the periodic knee-jerk reaction to Ukraine headlines, but if the situation escalates, it could distract from the efforts to stoke the fledgling economic recovery and to stave off deflation in developed economies.

Russian Winter or Spring Offensive?

More sanctions on Russia, not to mention the reenactment of Soviet-era imperialism, would be damaging to Europe. The continent's economic recovery is as fragile as a Faberge egg, and low single digit growth expectations could be tipped back toward contraction if Russia brushes aside western objections to territorial expansion. Even the German economic engine, which has led Europe toward recovery, could be damaged by a trade spat with Russia.

In the US, for the entire first quarter economists and companies have been blaming poor growth on the unusually harsh winter weather. Relentless snow storms across the country kept shoppers out of stores, hampered outdoor businesses like homebuilding, and delayed deliveries heavy industrial equipment by truck and by rail. Economic data got a pass for the entire season, culminating in the advance Q1 GDP coming in at a piddling 0.1% growth rate, missing expectations by more than a percentage point. That big miss has been brushed aside based on optimism for the rest of the year, and it is true that the Q1 GDP figure may be bolstered when the second and third revisions, using more complete data, come out in late May and late June.

So far the April economic data has been good enough to keep alive the narrative that the winter paralysis has ended and better times are around the corner. The headline numbers from the April employment report were stellar, showing the best nonfarm payrolls gain in over two years (+288K), and unemployment dropping an astounding four-tenths of a percent to 6.3%, its lowest level since before the financial crisis. Those data justify the Fed maintaining course on its tapering plan, and shifting its policy back toward the more standard qualitative guidance, having withdrawn its 6.5% unemployment threshold just in time to avoid difficult questions about what jobless level would trigger a rate hike. 

Hidden inside the headline unemployment data, like a Russian nesting doll, were some unsettling undercurrents. A closer look revealed much of the drop was caused by another decline in the labor force participation rate, slipping to its lowest level since 1978, when women were less likely to be part of the formal workforce (the male participation rate is at a record low for the modern era). The White House Council of Economic Advisors suggest the participation rate is subject to volatility and is also naturally weighed on by demographic trends, but some economist note that the unemployment rate would still be closer to 10% if the participation rate were more stable. Should the unemployment rate drop continue to be fueled by people leaving the workforce, it is sure to raise doubts about the quality of the US economic recovery.

China's slowing growth trajectory has been a fact of life for several years, but it could start grabbing headlines again if certain trends continue. The nation chalked up a 7.4% GDP growth rate in Q1 as employment and income growth held up well, but it was still a notable drop from the 7.7% rate achieved in the prior quarter and the slowest pace in year and a half. The cooling of the Chinese property market is contributing to this slower growth. New property construction had its worst Q1 since 2009, and the total value of properties sold slid year over year, confirming anecdotal reports of a real estate correction in some smaller cities.

China's atrocious March trade data is another worrisome sign. After blaming an unusual February trade deficit on the Lunar New Year holiday, Chinese officials had a harder time explaining away March exports down 6.6% and imports down 11.3% when a mid-single digit increase was expected for both. Some analyst believe the discrepancy is related to Chinese firms fudging invoices to exaggerate exports and bring capital into China to take advantage of the rising yuan early last year. The customs administration has since cracked down on fraudulent invoicing, creating a difficult comparison for Q1 trade data. However, a third straight month of poor trade readings on May 8th could set off alarm bells. 

Chinese officials insist these transitory data do not merit a major policy response. Summarizing the official view, Premier Li Keqiang recently stated that China "will not adopt short-term and strong stimulus policies in response to temporary fluctuations in the economy," but instead "will focus more on healthy growth in the medium to long term and will make efforts to achieve sustainable and healthy development." More negative data could change the minds of economic planners in Beijing, however, and raise hopes for a 'mini-stimulus' package.

To read the remainig article "From Russia with Love" by TradeTheNews.com , please fill out the small form below.

2.  Hot Market Report:  US Dollar Index

From our friend Jim Wyckoff

Jim has an excellent daily newsletter where he reviews different markets, alerts you for potential trades and much more. Included is his great bi-weekly newsletter with charts and a little longer term outlook. We recommend checking out his website, educational CDROM, and services at www.jimwyckoff.com click on image below to enlarge

The U.S. dollar index is a basket of six major world currencies weighted against the greenback. A feature in the market place last this week has been in the currency markets. The U.S. dollar index on Thursday morning hit a multi-month low, but then made a strong rebound by the end of the day and scored a technically bullish "key reversal" up, including follow-through buying on Friday, to begin to suggest the index has bottomed out. The rebounding USDX is a potentially bearish underlying factor for the raw commodity markets. Most major commodity markets worldwide are priced in U.S. dollars. When the value of the greenback rises on the foreign exchange market, it makes those raw commodities priced in dollars more expensive to purchase with other world currencies. .

3. Economic Calendar

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!