The rally extends, markets up on hope of more central bank stimulus
While there was plenty of headlines about the enduring Barclays Libor scandal and the resignations in the executive suite (CEO and COO), markets were mostly higher overnight on the back of a growing expectation that economic data is now weak enough to require more monetary stimulus from the ECB, BOE and Fed. This strange approach of bad news being good news reminds me of my childhood and reading the tales of Moonface in Topsy Turvy land where everything was turned upside down – Enid Blyton was onto something.
Certainly the inflation data in Europe overnight supported the room for the ECB to cut rates at least with the Eurozone PPI coming in at 2.3% year on year against expectations of 2.5%. Price pressures have eased materially in the Eurozone lately and the ECB should do something.
Data in the US was stronger than expected with automakers reporting good sales in June saying that demand had returned strongly and May Factory Orders in the US were up 0.7% which was stronger than expected and a big turn around from last month’s revised fall of 0.7%. Probably this was ignored due to the previous night’s ISM PMI which showed the worst fall since 9/11 as we noted yesterday and expectations that Friday’s non-farm payrolls will be weak.
Equally overnight, the IMF said the US recovery was tepid, warned of a recession and has downgraded its estimate for the US to 2% in 2012 and 2.3% in 2013. This is only 0.1% lower for each period which begs the question of how credible can something this exact on national accounts be, but it just adds to the growing pressure on the Fed for QE3.
So, at the shortened pre-4th of July holiday close there was universal euphoria across equity markets in the weaker economic outlook and the chances of further monetary stimulus. The Dow rose 0.56% to 12,943, the S&P 500 was up 0.62% to 1,374 and the NASDAQ rose 0.84 to 2,976. Across the pond in Europe the rally extended into its third day with the FTSE up 0.83% to 5,687, the CAC up 0.96% and the DAX up 1.26%. Our SPI futures are pointing to a higher open and strong trading today as we’d expect some catch-up since the ASX200 missed out on the universal gains in Asian trade yesterday on the back of reports of more Chinese stimulus in the press.
In commodity markets oil jumped over 4% and triggered a long on my system on the combination of the stimulus talk and the revival of tensions around the Iranian nuclear program. I guess nobody with a subjective approach to trading wants to get caught short in an environment like this and trend followers such as me were tripped into longs – so buyers entered the market. Gold was up 1.23%, Agricultural commodities had a great night which propelled the CRB Index up 8.4 points or almost 3%.
On currency markets, commodity linkage was the key with the AUD, NZD and the CAD all gainers against the US Dollar, and are slowly grinding their way higher. The EUR was stronger also against the USD, Yen and the Pound. Overall, however, I would characterise this first two trading days in currency markets as very tight with subdued ranges. The trends that emerged Friday are slowly continuing
Of course the RBA held fire yesterday which was expected but as even handed as their statement was I found in it a lingering fear of inflation suggesting no rate cuts for some time.
Just briefly in other news:
- Reports overnight were that the BoE and FSA were behind the resignation of Bob Diamond. If so, this is a good thing as central bankers take back the initiative of regulation and the she’ll be right mate approach to self regulation recedes.
- The ECB released a statement on its website capping at current levels the amount of government guaranteed debt it would take as collateral from banks for loans. This is curious and interesting – watch this space.
- Can you believe it? News overnight that Ireland is coming back to borrow in the markets – good on them but doesn’t it prove Greece should have just exited two years ago. If only!
- The deal to save Spanish banks is being delayed till July 20.
- It’s July 4th so tonight the US will be out.
Lets have a look at some of the markets we follow.
Crude: Oh Crude how I love thee. What a cracking set up for profit crude was in the past couple of days. It made a high, came back to test Fibo support, gave us a beautiful candlestick and then broke its high last night. The chart above is of the hourlies but you can see the moves clearly. One of my trading strategies that I use goes long on the the break of 85.26 overnight because of the setup I outlined above. The target was 88.31 so the high overnight just 30 odd cents shy mens I’ll tighten the stops up on this short term systems materially. On the dailies my other trend following system is now long as well.
EUR/USD: No change in the outlook here the price action in the EUR was better in the past 24 hours, but we continue to say, the EUR is not quite there yet. EUR needs to kick on through the 1.2738/42 zone if its going higher. For the moment that seems unlikely.
AUD/USD: My trend following systems are long but the AUD and even though the AUD has finally got through and is holding above 1.0262, which is necessary to kick it toward the 1.0474 region, check out the old trendline resistance. Yesterday I said I like it higher and it is now above, just, the 200 day moving average but it needs to clear this old trendline to kick on. I don’t want to see the AUD below 1.02.
S&P 500: The S&P 500 is breaking higher and looks like it is going to take the risk universe with it eventually – I’ll await the weekly close for confirmation on this one.
Data today is quiet domestically with just the AIG Performance of Services Index but I am interested in Europe tonight and how the Composite PMI and retail sales look.
Here is today’s data and you can click here for the full week’s calendar.
And here is how the markets closed at 6 am this morning.
Have a great day.
Macrobusiness Morning is the personal view of Greg McKenna. When referring to his trading systems, he means his own, not those of Macro Investor.
Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor MacroAssociates has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.