By Greg McKenna deputising for Chris Becker who’ll be back next week
So where have the markets gone this week? Past the daily noise and headlines, this weekly chart heavy post will examine the major markets (debt, commodities and currencies) with the Australian investor in mind.
Yuk! What a week on global markets – the troubles in Greece combined with a reappraisal of the Chinese growth path and that of its BRIC cousins to knock equities hard, see bond rates fall, drive risk/growth currencies like the Aussie lower and drive the US dollar bids right to the point of, but as yet not beyond, significant resistance.
Could it have been a week when we saw the pessimistic crescendo necessary for a bottom? You’ll find my view at the very end – I was surprised with the view that emerged.
Chris will give a wrap of last night’s (Friday) data and what happened as a result in Macro Morning on Monday but let’s take a longer term view now.
Let’s start as always with the US Dollar Index (DXY) – since this remains the reserve currency and the first barometer of risk.
As I wrote yesterday the US Dollar Index is close to a break out from last year’s highs but it has as yet been unable to push through. Given that markets were in a funk this week, and given the safe haven bid that the US dollar took as a result, this inability to break tells us that much is already priced in and puts us on notice that possibly/probably markets need further bad news otherwise some sort of reversal is in the offing:
Longer term the best you can say about the USD is that it is basing after a massive multi-year down trend. But it does look like it will trade higher eventually:
Euro (EUR/USD) – I’ve had a target of 1.2660ish as I’ve been writing in MacroBusiness Morning this week, as well as for some time now. So the low of 1.2640ish and then bounce and weekly close above this level suggests, like the US Dollar Index price action, that much of the potential and actual bad news was priced in this week. So we need further bad news out of Europe or last week’s low could be it for now:
So, in summary, my target has been satisfied and I am now less bearish than I was and have been over the course of May. A rally back to 1.2887/1.2950 is entirely possible. A break of last weeks lows at 1.2642 opens up the way to 1.2397.
The Yen – USD/JPY – The Japanese will not be happy that the Yen has been strengthening all the way through this market sell off that began back in March. GDP data this week was stronger than anticipated which only added to the Yen’s improvement and it looks like it is going to unwind most, if not all, of the much needed sell off from earlier in the year. Perhaps the 100 level in EUR/JPY might be support and help the Yen against the dollar over the week ahead if the outlook for the euro bears fruit.
Australian dollar (AUD/USD) – Ahhh the battler. Under pressure all week and unlike the euro and Dollar Index which held or couldn’t break important support the Aussie dollar looks to still have a downside bias. My personal view is that from a fundamnetal perspective the recent price action in global markets has been as much about a rerating of Chinese and BRIC growth rates as it has been about a simple fear of Greece and Europe. So the Aussie’s acute weakness is to be simply reflective of this:
Now, there will be a bounce of some sort sometime and my sense is that if the euro can head back toward the high 1.28’s or mid 1.29’s the Aussie will get pulled higher in it’s wake (US Dollar weaker). But the Aussie’s outlook is a little more sour and I continue to expect it to head toward the very important support zone around 0.9430 which was last years low and the previous range top as you can see by the red line in the chart below:
The green uptrend line that the Aussie broke through this week is now resistance and comes in at around 1.00 in the first few days of next week. Above here 1.0046 and 1.02 are the fibonacci retracement levels.
Gold (USD) – Gold bounced nicely off the support at USD 1534 that I highlighted earlier in the week and looks like it too might have made a short term low. But like the Aussie, it has broken a big uptrend which in the case of gold is multi-year. Time, and the outlook for the US dollar will tell on this one:
US 10 year Yields – Another market that got close to important technical levels and held. US 10’s, as you can see in the chart below at around 1.7% are as low as they have been during this crisis. Fundamentally I find it difficult to see a reason for a sustainable selloff (increase in yields) but technically this 1.65% region looks solid:
CRB Index – the commodities index is in a distinct down trend and has broken through important support which will now be resistance. The weekly close below this line is a bearish indicator and this outlook fits with my view on the fundamental drivers behind these moves in commodities and the Aussie dollar. I know you are not supposed to mix technicals and fundamentals but that is my process. Anyway here is the longer term CRB chart:
Crude– if you read MacroBusiness morning during the week you know that I think crude, in WTI terms, is headed toward USD 80 bbl. But the collapse in open interest for the active futures contract suggests that much of the selling may have simply been speculative unwinding of long positions. But given the marginal player sets the price as the outlook deteriorates so bids get pulled and the downtrend remains in force. USD 90 looks like it might provide support this week:
S&P500 – I identified 1277-1300 as the support zone for the S&P 500 previously and we are now in that zone and the 200 day moving average now sits at 1278. The MACD indicator I use is starting to look a little oversold so I’m guessing that this zone will hold in the next week. Longer term though I am targeting 1200:
S&P/ASX200 (XJO) – Now the local market, but before I write about that let me say that the result of all of the above, of the charts, of the thoughts that arise from putting this report together, both technically and fundamentally, suggest to me that after a very poor week and with critical levels holding, with so much bad news priced into the market and, I’m guessing, with positions being cut back – the market is positioned for a consolidation.
Short term the ASX200 looks like it is oversold based on a simple MACD indicator I use – very subjective I know:
This is reinforced when I look at the longer term chart from of the last 5 years as you can see below. It is both scary and supportive. Scary because if this trend line breaks the “bull” market from the 2009 low is finished and supportive because there are enough touches of this red line to put some faith in it. The level for the next week is the 3980 region which is also the December 2011 low:
Thanks for reading.
Greg McKenna
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