Markets were under pressure in the past 24 hours as Japanese Machinery orders tanked and the Chinese inflation data also spoke volumes about the underlying level of activity in China. This was compounded by European bond markets waving more red flags with Italian and Spanish bonds once again under pressure and the latter closing back above 7% and the former pushing toward the top of their recent range as well. But the stronger economies of Europe are still able to access unbelievable market rates with France and Germany borrowing short term debt at a negative interest rate overnight. That’s right, negative interest rates.
You don’t invest at negative interest rates unless you are scared about something, so coming on top of last week’s gloomy economic data which included the weak non-farm payrolls and poor ISM and global PMI data last nights price action saw equity markets close mostly lower.
The issue for the market and pundits is that the economic outlook globally is deteriorating and to quote Delusional Economics at our Weekly Macro Investor meeting yesterday this “economic downturn is rolling past Europe”. Indeed Nouriel Roubini was channeling his inner DE overnight when he painted a very negative outlook for the global economic. A perfect storm if you will, saying that there were 4 factors combining to make 2013 possibly worse than 2008 when Bear Stearns, AIG and Lehman Brothers all collapsed. Paraphrasing Roubini his 4 factors are:
- A stalling US economy
- The slow motion train wreck in Europe
- The slow down in economic activity slipping into the emerging markets and
- Military conflict in Iran and a spike in oil.
The first 3 seem highly probable but the 4th is unknowable until it happens, So the outlook is probably not as bad as Roubini suggests – until it is – if it is.
In central bank land the fantasy continued with a number of senior policy makers talking to themselves and their colleagues as the intellectual battle over the outlook for Europe and the United States continues to abstract either the market’s needs or those of the populace. Richmond Fed President Lacker reiterated his opposition to more stimulus while his colleague from the San Francisco Fed, John Williams, said if things dont go as expected then there would be room for more “accomodation”. The key here is that the data must deteriorate materially before QE3 gets on the table meaning the Fed can slip and stay behind the curve as this US weak spot widens. In Europe Mario Draghi, ECB President, said the ECB is ready to do more if needed. Once again behind the curve and staying there.
So at the close of play the Dow Jones was 0.28% lower to 12,376, S&P 500 -0.16% to 1,352 and the NASDAQ off 0.19% to 2,931 the DAX down 0.35% to 6,387, the CAC down 0.38% to 3,156 and in the UK the FTSE was off 0.62%. Our SPI futures are flat which no doubt reflects that Asia was more bearish than Europe and the UK.
In commodity markets crude spike higher on the back of the looming shut out in Norway closing up 1.12%. But there was more to the commodity markets than just the story about crude as pretty much every commodity I follow, 16 in all, were either flat or up. The CRB was up 4.88 pts to 291.80 and there was a continuation of the powerful rally that has been driving agricultural prices over the last little while. Lets hope that Australian farmers can benefit from this.
Currencies stabilised over the past 24 hours largely driven by the EUR finding support near Friday’s lows. The recovery wasn’t exactly stellar but then again the selling stopped just at a time when you might have expected EUR had nothing between it and 1.18. We’d characterise it as choppy and consolidating. The Australian Dollar was also supported as was Sterling and even Euro/Yen. I’m not overly bearish on the day as the charts suggest better price action ahead – that is USD weakness.
Just briefly in other news:
- The heat from the Libor scandal is moving into the regulatory space with BoE Deputy Governor Tucker overnight saying he did not encourage UK institutions to post artificially low rates.
- The Fed’s quarterly survey of senior credit officer opinion was introduced to give a feeling of the risk appetite of investors in 2010 and said: “With respect to credit risk, nearly one-fifth of dealers, on net, indicated an increase in appetite to take on such risk on the part of mutual funds, pension plans, endowments, and insurance companies”
- Dow Jones is reporting that there is disagreement amongst European policy makers over the plan for bank re-capitalisation.
- Alcoa managed to beat the downgraded earnings forecast by 1 penny per share at 6c once restructuring charges and other special items were stripped out. The actual number was a small loss of $2 million against the previous corresponding period of $322 million or 28 cents a share.
Lets have a look at some of the markets we follow.
Crude: I said yesterday that “crude looks a little over done on the 1 and 4 hour charts but still looks biased lower” so it was no surprise, in a price sense and abstracting any fundamental news like that coming from Norway, that it had a better 24 hours. It is very possible that what markets are not readying themselves for the next bearish jumping off point but establishing a wide range for a while until the outlook becomes clearer – one way or the other. Time will tell, even if I do have a bearish bias.
EUR/USD: there is nothing really encouraging about the EUR’s price action other than it rallied. One of my systems is still short but the other didn’t get triggered because EUR didn’t close below 1.2280 even though yesterday’s low was 1.2255. Longer term it seems biased toward 1.18 as noted yesterday but this bounce looks like it has further legs over the course of our day in Asia.
AUD/USD: The trend following system is still long and will cut out if the AUD falls below 1.0122. The AUD is not going lower unless or until the trendline from the recent low below 0.96 breaks. The AUD bounce off this line on the dailies and 4 hourlies last night so clearly traders are watching it.
SPI 200: Finding support in the 38.2-50% of the recent rally zone
DATA: Yesterday’s data in Australia was disappointing so we’ll be watching the NAB Business survey closely today. If I could only watch one piece of Australian data each month this is the one I would choose. We are still waiting for news from the EU meeting as I write.
Here is today’s data and you can click here for the full week’s calendar.
And here is how the markets closed at 6.00 am Saturday Morning courtesy of AVAFX
MacroBusiness is the blog of the Macro Investor newsletter. Take up your 21 day free trial.