Data and the Fed have hit markets hard overnight as the combination of the threat of the withdrawal of stimulus and the weaker prints were in some ways a perfect storm for stocks, in particular European stocks. The risk to this stock market rally was always going to be the data or the ability of earnings to underpin the Fed’s goosing of stocks. As we have seen many times since 2009 when the Fed’s balance sheet is not growing the stock market struggles.
First of all the FOMC Minutes reinforced the reality that the Fed needs to withdraw stimulus at some point and the fact that they are becoming concerned about the withdrawal of this stimulus sings loudly the fact they are thinking it has or might go too far and is becoming unstable. So traders now know, or at least have been reacquainted with, the fact that the Fed stimulus is not meant to be endless.
Secondly the data from Europe overnight was very disappointing with the Markit PMI’ all lower than they were last month. Indeed as you can see in the chart above the US manufacturing PMI although still nicely above the 50 expansion line was also lower. This highlights the fact that the data flow over the past few weeks across the globe has been on the weaker side of expectations as we saw reinforced again last night with the PMI’s and the Philly Fed survey which was expected to bounce from last month’s -5.8 to +1 by the punditry but instead printed at -12.5 for a shocker of a result. Even initial jobless claims which had been a positive for a while now jumped 20,000 from last week to 362,000 overnight.
The conundrum is that weaker data is likely to stay the Fed’s hand on any withdrawal of its buying program but with the genie out of the bottle and with markets having recently hit 5 year highs and with momentum having stalled in many markets it is my view that yesterday’s FOMC minutes will weigh on markets for a while yet.
The result of the above was that stocks in Europe were absolutely poleaxed. Milan was the stand out looser dropping 3.13% as the proximity of the election weighed. Madrid was 1.81% but the CAC in Paris was sold heavily with a loss of 2.29% while in Frankfurt the DAX fell 1.87% and in London the FTSE was 1.62% lower.
In the US with about 37 minutes to go the US is staging a bit of a recovery with the Dow down 0.26%, the Nasdaq is off 0.95% and the S&P is down 0.52% lower. As Joe Weisthenal of Business Insider wrote this morning its not exactly a crash but with the market having gone up without retracement for so many weeks now the level of chatter in the market reflects the feeling that further weakness might be in train.
Indeed, as you can see in this chart of the S&P 500 the bull market, or at least the positive trend as measured by our trend following metho, is at risk of reversal. So far we have seen the S&P rise without being able to break the trendline top for something like 3 weeks while at the same time staying above our fast moving average. But in the last few days the S&P has rejected this resistance, broken through our fast moving average (meaning we scale out of positions) and last night the low was on our slow moving average which is the point where we go flat if the price pierces this level.
So for the moment it is a little too early to say the bull market has ended on my usual indicators but it is clearly at risk and I feel there is more price falls to come once/if the slow moving average gives way. If 1489 goes look for a 50 point drop in the S&P 500 and a resultant drag on many other markets.
The Fed’s little bit of uncertainty about the timing of the withdrawal of the stimulus and the fact that they are talking about it in and of itself has been good for the US dollar. Add in a bit of instability in the equity markets around the globe and you get a bit of a safe haven bid for the US dollar as well and also for gold as we saw overnight.
As you can see in the table above the USD has done pretty well for the second day in a row. USDCAD has clearly broken decisively higher at 1.02, EUR lost 0.73% and is back below 1.32 sitting at 1.3185 this morning and more than one big figure below the high of the day. Sterling was absolutely crushed in afternoon Asian trade but found some buyers in the 1.5130′s and they chased it all the way back to 1.5249 for a gain of 0.11%. USDCHF rose 0.43% and the Aussie dollar was under pressure as well falling to 1.0225 as we write.
The Aussie is interesting for the safe haven believers because if their idea had any real traction the Aussie would be higher along with the USD not under pressure to break lower as it is at present.
Turning to the yen and we see that it rallied 0.52% against the US dollar with USDJPY now sitting at 93.04. I have been bullish since the 78/79 region but we see USDJPY as needing a solid retracement and believe that it will fall into the 91.90/92.30 support zone. I now expect it to break lower but we’ll have to wait and see.
Silver had a better night as well but crude fell heavily when the EIA stock pile data came out showing a build of 4.143 million Bbl against expectations of a 1.9 million increase. Crude dropped 2.39% to $92.94 and as we said yesterday we think it has still some way to fall.
The Aussie has been in a broad box since the low above 1.02 last week and support should be found in this 1.0215/25 zone if it is not to break back down toward the 1.0140 region. Yesterday I thought the Aussie might find some support and we went long in the 30′s looking for a run to the 60′s which we got before the reversal again. Today however I don’t have a strong view and will step aside unless 1.0215 breaks which might get me short:
Nothing of note in Australia today but more data from Europe tonight is likely to keep pressure on the euro and European stocks.
Twitter: Greg McKenna
Here is how markets looked this Morning
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