by Chris Becker
Macro Wrap
Well Friday was interesting to say the least with risk markets imploding and bond markets soaring in reaction to unfavourable US primary data releases. The reaction to the reactions this morning from the institutions and louder commentators has been even more interesting (particularly those unsure of what to make about the S&P warning of our sovereign AAA rating), with one of our favourites here at MB popping a vein over at Dad’s Army.
Delusional Economics has covered the European PMI deluge, Irish referendum, Cyprus trouble and ECB/ECU sheninagans here, whilst Deus Forex Machina has wrapped the market problems with the US releases, the USD and AUD and what is lying ahead this week on markets here, so I won’t repeat them except this chart showing the very obvious tepid recovery:
It bears(sic) repeating that this is the worst post-recession jobs recovery in US economic history – the number of new jobs is not keeping up with population growth, the only reason the UE rate doesn’t shoot up is because the participation rate is falling. This structural trend is now showing clearly as the up-cycle of 2010/11 (created by record monetary and fiscal stimulus, that was ill-directed) begins to wain.
Looking through the headline number and secular trends is what counts in macro analysis, not bleating about the inability of others to react to the “good” numbers.
The other major release – and a very important one, don’t be confused that this is just another piece of economy wankery – is the ISM Manufacturing Index. This is hugely correlated with the S&P500 (and hence our own bourse) and beyond the technical/price match, also displays the true strength underlying the US economy.
To be clear, the headline is not in contraction phase (at 53.5, with anything over 50 indicating expansion), but in context, this is a weaker number compared to the FY10 and FY11 numbers, which hovered around 58 points.
Today and the Week Ahead
Local data today includes the private TD/MI inflation gauge for May, with 0.3% expected, a report from the ABS which I shall be reading closely, on company operating profit for the first quarter (expected is 2.5% contraction – not good for underlying earnings) and business inventories.
Following that we have the ANZ jobs report – can they get back some credibility from the last one? Then again, the other private marker, the Roy Morgan survey, is also showing extreme volatility. It looks like ABS is still the cleanest of the dirty linen….
Regionally there is only Japanese monetary figures. I’ll update our Economic Calendar shortly.
More important than the data – what’s going to happen on the markets today? It’s obvious it will be a wild ride as Asia reacts to the falls on Wall Street on Friday night. The SPI Futures are down over 2% or 90 points to 3980 points….
It’s not looking good. I expect to see a big rush to bonds (Aussies already at 2.7% believe it or not), whilst gold is building on its gains from Friday, now at $1624USD an ounce. Good for Australian holders too, as the AUD rightly gets caned.
Here’s a quick summary of the carnage and delight of Friday. For a longer term view, check out my Trading Week article here.
Bonds:
- US 10 year Treasuries yields fell to another new low – 145% – with German 10 year bunds and UK 10 Gilts also trawling new lows, yields falling around 3 points each to a very Japanese 1.17% and 1.52%
- Italian and Spanish bonds were actually bid up, with yields falling 15 and 5 points to 5.7% and 6.45%
Currencies:
- The US Dollar remained strong but steady, which was interesting, at 82.8 points
- The Euro actually saw a big bounce or almost 1 cent to 1.2423 – put in context though
- The Australian dollar finished at 97 cents exactly but has slipped this morning to 96.61cents against the USD
Equities:
- The Eurostoxx 50 finished deep in the red, now down nearly 10% for the year to date.
- The biggest mover was the German DAX, crashing 3.4%, nearly wiping out its gains for the year (still up 3.5%) Other Euro markets were down at least 1-2%
- US markets were all sold off, with the Dow off 2.2%, S&P500 2.5% and the NASDAQ losing 3%. These are not “normal” correction moves in my book and are likely to be followed by plus/minus 2-3% days as volatility takes its toll.
- Here’s the CBOE Volatility Index to get an idea. I did warn – repeatedly – that the VIX was far too low and that simple hedges could be made to offset a probable drop in risk prices. Its up nearly 90% since:
Commodities:
- Finally to commodities, the underbelly of the risk-on complex. I think we will find the moves here the most interesting to watch, aside from plunges on equity markets.
- WTI Crude dropped over 4% to just below $83USD per barrel, whilst ICE Brent did the same down to below $100 to $98.29 for the first time since September last year:
- Again, regular readers of Trading Week would know that I thought this market was ripe for a big move and had been shorting it for awhile. As the chart above shows, its down over 20% since the top….
- Now we come to even two more big movers: Gold (USD) exploded out the gates, reversing its wakn basically steady through the night, closing at $1560 USD an ounce – more on that later
- In contrast Dr Copper fell 1.4% in London to $7340 a tonne
- I’ll be watching iron ore spot prices closely today, another market ready to make a big down move in my opinion as speculators want to dump it as stocks continue to rise on ports in China. On Friday it was unchanged at$135USD per metric tonne but I think we could see falls to $115-120 shortly. Stay tuned.
Click here for our economic calendar.
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