by Chris Becker
Macro Wrap
So that’s that then. Wave a magic wand and voila, “everything is fine” and risk is off to the races (and ministers off to soccer matches, FFS)? Although I won’t call this dead and buried just yet, it seems the half life of bailouts has been diminishing since the first QE package back in March 2009. And markets are starting to get it – that papering over structural cracks with bailouts, without addressing the core problem (there is too much damn debt) will not result in a sustainable recovery.
This remains a trader’s market ladies and gents – in our weekly meeting yesterday at MA/MB I was asked about the technical picture behind rallies post-correction, post bailout. In essence, we have been averaging 18 weeks of price volatility (where the weekly price gravitates under or around the 200 day moving average) before a breakout and a new bear market rally. But each new rally has a shorter life than the previous.
Last night’s very, very disappointing (to the permabulls) “relief” lasted until the US open and not much more. A not unusual 2% plus green screen in Europe (remember most volatile aftermaths in corrections have half a dozen or so +/- 2-3% days) turned into dust.
There were only two major data releases of note – French industrial production, which surprised on the upside by growing 1.5% in April which was very good news, after the slowdown in growth since the peak in August 2009. However, the news wasn’t good south of the Alps, with final first quarter GDP figures for Italy coming in at -0.8%, contracting 1.4% over the year.
The Federal Reserve also released a good report, noting that the average American family lost nearly 40% of their wealth between 2007 and 2010, because of the housing bubble and subsequent debt deleveraging. The situation is not as dire here, but as you can see on the RBA Chart below, as a percentage of disposable income (which is growing, albeit below trend), total household wealth in Australia is also stagnant.
Today and the Week Ahead
Its CPI week but today we get Japanese PPI figures this morning, UK industrial produciton later tonight, plus the secondary weekly retail sales surveys from ICSC/Goldman and Redbook, before the US Treasury budget is released (a staggering -$125 billion deficit expected for May).
Markets reopen in Australia after the long weekend, and the sentiment has soured from the expected ebullient open on Friday. Futures are not looking good – down over 80 points or nearly 2% to 4060 points – i.e back to where we started on Friday.
Here’s a quick summary of last night’s move in markets. For a longer term view, check out my Trading Week article here.
Bonds:
- US 10 year Treasuries yields fell as risk scattered back to safety, down to 1.58%, with German 10 year bunds yields falling 2 points to 1.3%
- Peripheral bonds exploded – and now Italy is above the crucial 6% level, whilst Spain is back to almost 6.5% as yields gained almost 30 points each. Italy is crunch time…
- Aussie 10 years have now slipped below 3% in early trade, yields falling 6 points to 2.98%
Currencies:
- The US Dollar Index surged by over 1% to be at 82.63 mainly due to Euro, which is also back to where it was before the bailout news, dicing with the 1.245 level
- After almost hitting parity, the Australian dollar has slumped again falling over 1 cent to 98.61 cents against the USD this morning. As a risk proxy, the AUD is King.
Equities:
- The Eurostoxx 50 finished down for the day – believe it or not – after the Spanish IBEX 35 first surged (with Spanish banks up 6-8%) almost 3% but then reality set in
- The German DAX actually finished up 0.2%, with the FTSE 100 flat, but it was the FTSE MIB Italian index doing the damage, down nearly 3% overnight and 14% YTD, and astonishingly, down 71% from its peak in 2007:
- In the US the mood was worse – no milkie wilkie yet boys- with the Dow down 1.1%, the broader S&P500 further down 1.2% and the NASDAQ even more, down 1.7%
Commodities:
- The real gauge of the mood can always be found in commodities (if I had to trade only one “set”, it would be commodities) WTI Crude took back all of yesterday and more and is now dicing with $80USD per barrel, whilst ICE Brent is back under $100USD per barrel again at $98 exactly. Hopefully this translates into cheaper fuel prices…
- Gold (USD) remains a conundrum – and just refuses to settle into a dominant short term trend, as it remained unchanged over the night at $1594USD per ounce. One still to watch, but stuck in a trading range around the key levels of $1525 and $1625
- Iron ore is doing fine though, bouncing off the $130 support level, climbing almost $1 per metric tonne yesterday to $132.30 a tonne, but too remains in a trading range since November last year.
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