Chinese stimulus plan only stimulates markets for a few hours as risk aversion may return in force. Market seems to be grasping for a catalyst.

The Chinese stimulus package announced over the weekend only managed to stimulate markets for half a day as the North American session yesterday saw the pendulum swinging back to bearish mode. The JPY crosses found resistance rather quickly and EURJPY traded from a high well over 128 to a low in the late Asian session just below 124.00. Still, the cross has been embedded in a range for the last eight trading days as the market seems to be stuck in a holding pattern and trying to decide whether it wants to go into meltdown mode again or whether there is hope for a rally. The inability of the market to generate more enthusiasm on an announcement like the Chinese stimulus plan appears to tilt the odds in favor of further risk aversion. It's difficult to determine the accuracy of Chinese numbers, but we will watch the Retail Sales number released tonight with interest. It would seem that the tremendous size of the stimulus plan had something to do with how quickly the production-driven economy is deteriorating.

The UK Retail Sales results out overnight are pressuring the pound once again. Like-for-like sales (similar to same store sales in the US) fell -2.2% and total sales fell for the first time since the spring of 2005. GBPUSD tested lower in early European trading and looks like it wants to threaten the 1.5270 lows for the cycle, though its path has been a slow and churning one. EURGBP is again rising back toward the big 0.8200 level, which is the approximate high or the cycle. We are a bit surprised that the EUR is performing so well versus the pound - let's see how the pair behaves if it closes above the old highs. This would supposedly open up for further gains on a technical basis, perhaps towards 0.8500, though we're not excited about the EUR's prospects so we're a bit reluctant at these levels from a fundamental perspective.

The action in the major USD crosses seems lack conviction and we wonder what the market is looking for in terms of a catalyst. The near perfect triangular consolidation in EURUSD gave way to the downside briefly this morning, only to rally back into the range, a further sign of lack of conviction. It feels like FX is very much a follower of other markets rather than a leader in the current market environment and if that is the case, then we should perhaps be focusing on the equity market for direction. It looks like a key test for FX could be ahead if the S&P500 tests below 900 again, which we imagine would trigger the usual risk averse behavior of stronger JPY, CHF and USD vs. the broader market.

Again, the calendar focus for the week is the US Retail Sales data for October on Friday. Retailers are feeling tremendous pain and are apparently already marking down merchandise heavily as they have been unable to move fall stock and as a way to snag early Christmas shoppers. A further sign of distress, Circuit City, a large consumer electronics retail chain, filed for bankruptcy yesterday. We may be about to see the worst US holiday shopping season in recent memory as competing retailers do everything to chase a smaller pot of dollars consumers are willing to spend. But is the news already discounted? Another focus may be the theoretical Nov 15 deadline (45 days before end of the quarter/year) for investors announcing their desire to pull out of hedge funds vehicles. Is liquidation risk still circulating out there?

News headlines seem to be dominated this morning by corporations announcing costs savings and job cuts this morning. The authorities are going to be hard put to bring enough stimulus to counter the self-reinforcing negative momentum developing in the world economy. Let's hope we have something cheerful to write about soon.

Chart: EURCHF
The classic risk barometer saw a bearish reversal yesterday after trying for new highs on the countertrend rally on the bout of risk appetite brought on by the Chinese stimulus plan. 1.5000 seems to be psychological support here, as is the 21-day SMA (the blue line). If we get a new downleg in equities, we would expect this pair to drop in sympathy as it has done in the past, perhaps toward the 1.4500 area initially.