MacroBusiness Morning

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.

www.twitter.com/gregorymckenna

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.

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Comments


  1. universal euphoria across equity markets in the weaker economic outlook and the chances of further monetary stimulus

    What a crazy world.

    S&P not there yet for mine, but close.

  2. “The rally extends, markets up on hope of more central bank stimulus”

    I’m not quite sure if I’ve heard that one before, but it seems familiar somehow…

      • The one where you were negative AUD, and couldnt believe how quickly you were being proven right.

        • Deus Forex Machina

          It’s all about time frames – I’m actually writing a piece on the very topic of that call for publication tomorrow

          It’s all about time frame though with currencies…i can have 3, 4 or 5 different views over various time frames and for various clients.

          When the Aussie started to bottom I thought it would get back to 1.02 which it has done and if it can drag itself over this trendline – which it is trying to do then it looks like 1.04+

          But longer term I still hold the view the Aussie will head back toward 0.9000.

          If you are trading thats a useless view but that’s not what it is for.

          On another point though this note is my daily musing’s which I share with the MB readers – it’s just a written down version of the process I have been following for 20 years. Its a very different time frame to the longer stuff that i will write.

          Cheers and thanks for the opportunity to clarify.

          All the best

          Greg

          • The Patrician

            Ok, so its about time frames.

            So what is your time frame for this statement?

            “But longer term I still hold the view the Aussie will head back toward 0.9000.”

          • Deus Forex Machina

            Well actually yes…I do

            The long term future for the world is low growth… and whether it is the AUD or other asset markets as I said in your linked article at the end

            “There will be bounces along the way but I retain my view that the Australian dollar is heading lower in time, substantially so.”

            It is the same for economic statistics and to take the analogy all the way back to the original piece on the Aussie falling and its catalyst the 3 year swap trade from last year there were times when I was being told that i had no idea – such is the case with big calls over big time frames – but in the end we saw it Aussie 3 year swaps trade down below 3%.

            It’s true I hadn’t expected that I only thought they’d go as low as 3.28% but in the end they got there.

            The Australian data has bounced a little that is undeniable and I hope that it continues to and i’d prefer to get this call completely wrong because getting it right means that Australian’s are suffering. but a view based on the global economic outlook is a view and i stand by it.

          • Deus Forex Machina

            Lets say the next 12 months – just so you know the money is going where the mouth is I’m buying Major Bank Debt denominated in USD’s for my super fund with a 2015 maturity.

            Not suggesting anyone else should but just so you know I eat my own cooking – whatever the result.

            But equally as I said yesterday when the outlook changes I’ll change my view.

          • Deus Forex Machina

            Anytime P

            It is difficult to communicate when you only write sparodicaly.

            Hopefully these daily notes will help be better explain my thinking and how it evolves in a way that the more infrequent pieces never could.

            Have a good one

            Greg

  3. Deus Forex Machina

    I’m with AVAFX Australia – they have just launched in Australia and I am working with them and cross marketing for Macro and them in the FX/Trading space.

    Here is a link if you want to evaluate them

    http://www.avafx.com/?tag=29043

    Bit of a daggy site but I like the software and its capabilities and they are ASIC regulated.

    • Thanks Greg – I will have a good look at them.

      I’ve been affected by the collapse of MF Global, an ASIC regulated company – so I’m sure you can understand that my opinion of ASIC regulation is very low. I mean, several months on I still have no access to my trading funds, I do not know when or how much of my funds I will get back, and the administrators are paying themselves from the client segregated account funds as this fiasco drags on through the (expensive) courts!

      So, I’m interested in what else you (or others) look for in a broker besides the fact that they’ve paid their ASIC / AFSL fees?

      • Deus Forex Machina

        Absolutely – first question I ask all of the brokers when I talk to them is the MFG one

        The problem with MFG was the same problem as LTCM. That is a big name/s thought he/they knew everything and blew the firm up in a manner that no one ever thought he would. So it is almost impossible to guard against.

        So the first question you have to ask your broker is are you acting as broker and price maker/aggregator or are you taking significant positions unrelated to your role as a broker/price maker. If the answer is yes to the back end of that question then they are not on my list.

        In the end I came up with a short list of 3 possibly 4 who I thought I would trade with.

        But let me offer a snapshot of my checklist and My other criteria

        1) the MF Global question,
        2) meet the principals (which I grant you I can do but you probably cant)
        3) understand the client segregation and where the money is sitting (can the firm take it for trading) even though you are always mixed in with other clients
        4)how long has the firm been around
        5) International reputation Software
        6) ASIC AFSL – but I take your point above
        7)How they trade – 5k in an account and see if I get snipped which I have at a number of shops who I will never trade with again. While others had full liquidity even on NFP nights in 2008 and 2009 – withing acceptable tolerances at least
        8) trade rejection rates (that is 8 I don’t know why i got smiley – sorry)
        9) and then software – I don’t like Meta Trader as I grew up on Tradestation in the 90’s so i normally use the Proprietory stuff which these days is closer to TS

        I’m not concerned about spreads per se because I am not the type of trader where the spread matters to my long term success (within reason of course) but i understand that is important to some and 1 of the partners I will be using has tight, very tight, spreads.

        Ohh…and the other thing I do I have most of my money in a high earning at call account and put less in the actual broker account but trade it at a higher effective leverage. For example I would instead of trading 5:1 on my account with everything invested at the broker I might be trading at 25:1 inside the machine. That way I get the same overall leverage on my account but I control most of the money.

        I hope this helps.

        Cheers
        Greg