Central bank easings fail to lift market focussed on economic weakness.
Central Banks in Europe and China took action to try to stimulate their economies overnight but after an initial positive reaction markets, particularly currencies and commodities, focussed more on the reason for the cut and less on the actual cut. The BOE left its rate at 0.5% but announced another big round of QE saying it would pump £50 billion into the economy. At the same time the Central Bank of China announced that it too was cutting monetary policy and markets reacted positively initially as they awaited the ECB decision. The ECB decided to trim its rates by another 25 basis points but this was widely expected and ECB President Mario Draghi gave no hints of further stimulus and many market players were clearly hoping for something more decisive.
I like the take I saw from Lombard Street Research via Business Insider:
Other than doing nothing (their recent strategy) or actually raising rates (on past form not unthinkable), it’s hard to see how the ECB could have provided any less support at today’s meeting. The 25bps cut in interest rates (to 0.75%) is at least a month late – after all, that is when the latest deterioration in euro-area data occurred. In addition to waiting for clarity in Greece, it appears some ECB members wanted this trivial move to be a reward for politicians ‘doing the right thing’ at their recent summit. If that’s the case, it’s a silly, highly political way to run monetary policy.
…Markets liked today’s central bank moves because they appeared ‘co-ordinated’. But that seems to be true only in the sense of their timing. For the global economic outlook to genuinely improve, a much deeper sense of shared responsibility is required. That is most obvious within the euro area, but it is also true at the global level.
That is exactly it. Too little too late from an ECB that doesn’t seem interested in actually helping fix Europe’s troubles and a global pretense of co-operation which is a facade as policy makers chase their own national self interest. Clearly also the further we get into this crisis the shorter the half-life of policy action on markets and the bigger the growing disconnect, at least in my mind, between equities and commodity prices.
Big news in bonds overnight as Ireland returned to the debt markets for the first time since its bailout, raising €500 million at an average rate of 1.8%. It is interesting and scarily to note that Ireland is paying less for its 3 month debt than Spain. Indeed Spanish bonds were under pressure again last night with yields at auction of 10 year notes averaging 6.43% which is higher than they were on June 7 when they printed 6.04%. Spain’s troubles are still weighing on markets.
So by the end of play the moves by the three central banks failed to get equity market excited as they await the non-farm payrolls in the US tonight. The Dow was down 0.36% to 12,896, the S&P 500 fell 0.47 to 1,367 while the NASDAQ was flat. Across the Atlantic the FTSE closed up 0.14% the CAC fell 1.17% and the DAX was 0.45% lower. Madrid is not a market I follow every day but according to Reuters this morning it got smashed for 2.95%. Perhaps it Delusional Economics fault given his prediction that the crisis is re-emerging was linked across Europe via the FT.
On commodity markets, oil spiked initially on news of a Norwegian lock out but reversed very quickly and ended down at 86.74 Bbl after a high of 88.96 earlier in the night. Quite the reversal when you note that US inventories fell by 4.3 million barrels versus the 1.3 million fall anticipated by analysts! Gold was off as well falling 1.13%, silver reversed the earlier week gain and dropped 2.28% and copper was off 1.43%. The CRB managed to rise 0.62 to 293.26 largely on the back of some spectacular rises in corn, wheat and soybeans, which is another problem that the world does not need right now.
In currency markets it was all about the USD and the EUR. The EUR had been doing well on the day but after the ECB announcement, particularly dropping the deposit rate to zero, it got crushed. The key is the enduring disappointment that the ECB is reactive rather than proactive and then latter comments from ECB President Draghi that the risks surrounding the economic outlook remain to the downside and that there was no discussion of any non-standard measures (read LTRO) at the meeting. As I write the EUR sits at 1.2393 from a high yesterday of 1.2537. Certainly the USD benefitted overnight but it seems it is the Australian Dollar (AUD) that is the primary beneficiary amongst the major traded currencies. AUD/USD is currently sitting at 1.0285 which in the context of the EUR’s fall is pretty good and as a result the EUR/AUD has fallen to 1.2037 which I is an all-time low. Our Macro Investor EUR/AUD trade has been a complete winner – nice one The Prince! Sterling, GBP, was also under pressure and the Yen continues to bounce of trendline support.
Just briefly in other news:
- The Danish central bank cut rates from 0.05% to -.2%. That is correct – negative interest rates!
- US data was on the right side of OK with the ADP survey stronger than expected at +176k and jobless claims coming in lower than forecast at 374k. ISM non manufacturing was weaker than anticipated coming in at 52.1 v 53.0 expected. All eyes are on non-farm payrolls tonight.
- Bundesbank President Weidmann was hosing down expectations for the ECB to backstop Europe saying the ECB can’t replace monetary policy and has taken considerable risks on its balance sheet. He also said that the rescue funds can not get a banking licence – IE no leveraging.
- Barclays was downgraded by both Mooodys and S&P.
Lets have a look at some of the markets we follow.
Crude: I loved the the other day but it was unrequited. The nature of the fibo break out trade I had on meant that it hit the target and the trade was exited. But I thought that the bigger picture was for more rallies and one of my trend following systems go long. But look at that candlestick from yesterday’s trade – ugly, just ugly!
EUR/USD: Yesterday I said that “this one now looks focussed toward 1.2430/40” and as you can see in the chart above it was certainly a down day with the low overnight at 1.2366. As I also noted we are now looking for the real level of EUR support and it looks to be finding some at present with both the 1 and 4 hour charts suggesting a consolidation/bounce in our time zone today. My sense is last week’s lows should hold for the moment but NFP tonight is the key fundamental driver of this over the next 24 hours.
AUD/USD: My trend following systems are still long the AUD but it is struggling to get through the old trendline I talked about all week. It might seem stupid to say that the next 24 hours are key but with the trendline intact, the AUD needs to close above it or it will turn south next week. As I have noted all week I don’t want to see the AUD below 1.02 as that would signal a deeper retracement.
ASX 200: Ugly candlestick for the last 24 hours but an interesting pattern here – I would be interested in hearing what people think of this one but for mine it was able to kick on and is now focussed back inside the range.
Data today has the AIG Performance for Construction number for Australia before some IP numbers in Germany and then the single biggest economic release each month in non-farm payrolls in the US. Even after the ADP numbers printed strongly last night most people are expecting weakness. So there is a trading op on the release if it surprises as Calculated Risk argues it will.
Here is today’s data and you can click here for the full week’s calendar.
And here is how the markets closed at 6.30 am this morning.
Have a great day.
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Macrobusiness Morning is the daily market wrap and personal view of Greg McKenna. It is offered as an example of the process he has been following for more than 20 years each morning. 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.