Keystone's Key Events and Market Movers 5-31-11

Keystone presents the following underlying market currents, sometimes subtle sometimes turbulent, that move global markets in real time.  The key dates and times below typically correspond to market pivot points.

The euro crisis and U.S. debt crisis figure prominently in June coming to a head the second and third weeks with meetings and demonstrations.  China rate hike will occur any time.  For the U.S., Consumer Confidence and Jobs Report are the most important data to start the month of June.  Markets remain in the eclipse sell off window this week and the Bradley turn windows begin mid June.  Shaping up to be a volatile June ahead.

Keystone’s ‘Short Term’ Key Dates and Market Movers Week of 5/31/11 and on:

·         Tuesday, 5/31/11: The holiday is over and the trading week starts off quickly with Case-Shiller at 9 AM EST (watch housing sector), Chicago PMI 9:45 AM (U.S. manufacturing weakening lately, see if this trend is continuing, watch industrials sector) and Consumer Confidence 10 AM (pivot point, watch broad markets).  3 and 6-month bill auctions 11:30 AM (watch dollar and treasuries).  Also, final effects of the eclipse sell off area are still in place early this week—markets dropped 3% in this eclipse window during May thus far.  Earnings; LAYN (5/30), RENN. India growth rates.

·         Wednesday, 6/1/11: Motor Vehicle Sales, Challenger 7:30 AM, ADP 8:15 AM, ISM 10 AM (watch energy sector), Construction Spending 10 AM (watch housing sector), 4-week and 52-week bill auctions 11:30 AM (watch dollar and treasuries).  Earnings: CWTR, DG, VRA (watch retail sector). Bahrain should be lifting the emergency rule today—watch for violence (oil, gold and silver up), or peaceful assembly (oil, gold and silver down). China PMI and HSBC China PMI (HSBC more important). Hurricane season begins.

·         Thursday, 6/2/11: Monster 6 AM, Claims 8:30 AM, Productivity 8:30 AM, Oil Inventories 10:30 AM (one day later because of holiday), Factory Orders 10 AM. Earnings; CMED, JOYG.

·         Friday, 6/3/11: Jobs Report 8:30 AM.  ISM Non-MFG 10 AM. Rosengren speaks 3:30 PM one-half hour before the markets close.

·         June 2011:  PBOC (China) Rate Hike. Probably 25 bips again, target date area for China raise is 6/1/11 thru 6/24/11.

·         June 2011:  EU Bank Stress Test Results, Greek rally against austerity 6/4/11, Euro Finance Ministers 6/20/11, Euro Heads of State meeting 6/24/11—a 24-hour Greece strike also targets this date.

·         June 2011:  OPEC meeting.

·         June 2011:  QE2 Ends.  See the POMO information below. 6/10/11 final POMO schedule.

·         6/15/11:  Bradley Turn date. Market turn window 6/8/11 thru 6/22/11.

·         6/21/11 and 6/22/11: Fed FOMC Rate Decision and Policy.  No change expected, note the same date as the Bradley turn, perhaps a surprise is on tap.

·         6/22/11:  Bradley Turn date. Market turn window 6/15/11 thru 6/29/11.

·         7/15/11: Eclipse Sell-off Technique targets this time frame as a potential large market sell off area. The May time frame that was targeted sold off over 3%.  Therefore, this lessens the likelihood of a sell off in July ever so slightly since the May sell off absorbed some of the negativity for this May to July eclipse zone. But, remain on guard for a substantial July sell off nonetheless.

·         7/29/11 and 7/30/11:  Major Bradley Turn date. Major market turn window 7/22/11 thru 8/7/11.

·         8/9/11:  Fed FOMC Rate Decision and Policy. No change expected.

Keystone’s Short Term to ‘Intermediate Term’ Key Dates and Market Movers June and on:

·         POMO Pumps for QE2 thru 6/30/11:  Markets receive bullish pumps between 10:00 AM and 11:30 AM each trading day favoring market bulls.  Pumps continue thru 6/10/11 when the final QE2 schedule will be announced. N-D 75, D-J 75, J-F 80, F-M 80, M-A 80, A-M 80 B, M-J 80, thus, a total of 550 billion.  The POMO program was slated to be 600 billion total so on 6/10/11 the Fed will release the final schedule thru 6/30/11 which will be most likely the final 50 billion where the Fed uses the entire amount they originally targeted.  This reinforces Chairman Bernanke’s dovish view concerning the weakening economy and transitory inflation.  Thus, POMO pumps continue for 5 more weeks but traders will now worry about what happens when the punch bowl is taken away, probably falling equities markets. POMO pumps=bullish equity markets. POMO pumps end=bearish equity markets.

·         FOMC Meetings and Rate Decisions:  6/21-22/11; 8/9/11; 9/20/11; 11/1-2/11; 12/13/11. Fed should keep the Zero Interest Rate Policy (ZIRP) in place for the foreseeable future.

·         Congress to Raise Debt Ceiling: Geithner said 5/16/11 first, then 7/8/11, but now he really, really means it, with a drop dead date of August 2nd. Some in Congress say if Geithner has already moved the deadline forward, maybe it is not that big of a deal after all, and this is fostering complacency in Congress.  Congress never makes a decision until a deadline is in place.  Some republicans already saying the consequences will not be too bad if the deadline is missed—‘we’ll just shuffle some money around’.  Congress clowns now have 9 weeks to raise the debt ceiling, tick, tock, tick…

·         Congress In or Out of Session:  Market bullish when not in session, market bearish when in session. Congress is in session, so market bearish.

·         Europe Debt Crisis Continues:  Portugal, Ireland, Italy, Greece and Spain, the PIIGS.  Italy’s bad paper may become exposed due to Libyan War.  Portugal, Ireland, Italy and Greece the focus, Greece is a lost cause. Greek public rally 6/4/11 against new austerity measures perhaps weakening euro late in the trading week 6/2/11 and 6/3/11. 6/24/11 target date for Greek 24-hour strike to protest austerity. Greek unemployment data 6/6/11. Eurozone Finance Ministers meetings 6/20/11. Euro Heads of State meeting 6/24/11, thus, euro woes continue to heat up possibly reaching a head in mid June, a couple weeks away. Greece to repay a 5-year bond 8/20/11.  Weaker euro=stronger dollar index=weaker commodities=weaker U.S. equities.

·         ECB Rate Hikes:  Trichet announces next rate decision early June, but the bite has came out of his bark.  No change occurred 5/5/11.  Trichet is less hawkish no longer talking about ‘strong vigilance’. Trichet raised rates 25 bips on 4/7/11.  An informal target of 2% by the end of 2011 was the consensus but this is dropping after no change 5/5/11 and Trichet’s less hawkish mood.  Trichet may have unwittingly called another top in the commodities markets just like he mistakenly did by raising rates at the wrong time in July 2008.  Trend has been euro up=dollar down=commodities up=equities up.  Euro propped up by Trichet’s hawkishness, thus, if euro now reverses, euro down=dollar up=commodities down=equities down.

·         Ongoing Wars: Libya, Iraq and Afghanistan. Libya not a big oil producer; Saudi’s can easily step up production to handle any Libyan oil loss.  Premiums remain in gold, silver and oil prices.  Any positive resolution to the Colonel Gaddafi situation, or ME tensions in general, will cause this premium to come back out.  Rational price of oil is low to mid 80’s but rationality never matters in trading. Oil will probably settle in the low to mid 90’s as the months tick along.  Wars and ME problems continue=bullish for commodities, gold, silver and oil, and, visa versa.

·         Continuing Geopolitical Events other than Ongoing Wars: Egypt, Syria, Saudi Arabia, Bahrain, N. Korea:  Dollar bullish and equity bearish.  Gold, silver and oil bullish.  Bahrain is the big worry since, unlike Libya, further unrest will impact oil supply.  Emergency rule in Bahrain is to be lifted June 1, so the coming days violence, or lack of violence, will move the oil price accordingly. Yemen is important as well since it is a southern Saudi border. Bahrain news impacts commodities in real time.  Any bad Bahrain news=higher gold, silver and oil prices, and, visa versa.

·         State and Muni Crisis; Union Busting:  Muni’s should experience pain first.  Muni’s rely on State funds.  Many State budgets turn over in June and July.  Colleges relied on State funds. Lingering unemployment lessens government tax inflows. U.S. will probably see an increase in the cash society, due to higher taxes, hurting government coffers more.  Multiple U.S. cities now experiencing budget fights and protests.  Governments trying to reduce burden of high union costs.  California financial decisions are occurring now.  Will these decisions spook the country? State and Muni problems are a H2 2011 and 2012 story.

·         College Debt Bubble: Students continue to take on mountains of debt and cannot get a job after education.  No effect near term but in the months forward the loan defaults will be a problem.

·         China Property Bubble and China Contagion:  When it pops, anytime now, it will be extremely negative on global markets causing contagion in Asia and elsewhere. China has built uninhabited cities to fuel their explosive growth during this century. Some evidence of Chinese now using hoarded copper supplies as collateral to continue the building.  This is going to end very badly.  Keystone agrees with Jim Chanos on China. China bubble pops=global markets down.

·         PBOC; China Rate Hikes:  First hike 10/19/10, 25 bips; second hike Christmas 12/25/10, 25 bips; third hike at end of China New Years on 2/8/11; fourth hike 4/5/11.  China said in 2010 that it will project about five hikes into June 2011.  Hikes have occurred October, December, February, April so the pattern reinforces the June hike next.  Bank reserve requirements are now ratcheting up continuously to slow down inflation but these appear to have less of an effect now.  Rate hikes cause commodities, gold, silver, PM’s and copper to sell off.  The 4/5/11 rate hike had a muted effect since Chairman Bernanke’s hot easy QE2 money is more powerful. Typically, rising rates reflect a countries currency, economic and market strength, but, China growth is slowing now, not increasing, which creates an odd rate raising environment. Target for China rate hike is 6/1/11 thru 6/24/11.  China raising rates and reserve requirements=lower commodities=lower US equities.

·         China New Premier:  Chosen in 2012, will it be a smooth transition?

·         India, Brazil, Taiwan, South Korea and other Emerging Market Rate Hikes:  Same effects as China rate hikes; commodities will sell off.  China, India and Brazil hikes are most important to global markets. Some emerging countries now choosing to stay on hold reinforcing the belief that inflation is transitory in nature. Chairman Bernanke’s hot easy QE2 money pumped up emerging markets and commodities for the last nine months.

·         Japan Disaster; Yen Currency Intervention:  The global markets are treating the disaster as a Japan problem with limited global impact.  Supply and parts concerns are occurring now due to Japan factory outages; automobile and technology markets most affected.  Additionally, Japan is performing policy manipulation and currency intervention to target the 85-86 dollar/yen area.  This could not be maintained so far, or 83, or 81.  Expect further coordinated intervention now. Dollar/yen up=dollar up=euro down=commodities down=equities down.

·         Oil; OPEC; Strategic Oil Reserve (SOR); Hurricane Season:  SOR adding some supply each month due to renovations.  OPEC meeting in June, Ahmadinejad will object to any Saudi production increase. Hurricane season now so that may keep oil price buoyant. Higher oil supply=lower oil price. Hurricane=higher oil price=good for construction material companies. Rational oil price is 80-85 so a 20 dollar premium remains; oil likely to move sideways thru the low to mid 90’s as the year progresses, or lower.

·         Wiki Leaks; Financials:  Embarrassing bank information rumored to affect BAC most of all.  2-10 spread nearing 255 number as per Keystone’s 2-10 Spread Indicator, where the yield curve is no longer as attractive for banks.  Watch the spread closely since a spread under 255 will exacerbate the fall in financials.  Weak financials places a cap on broad market upside. Also, financials and technology go hand in hand, thus, weak financials weakens technology further limiting upside potential for the broad market indexes.