My subjective investment thesis is fairly simple at the moment. That is markets, read equities and risk assets, will struggle to make sustained headway while bonds and the US Dollar will remain bid until the Fed comes back with QE3.
The reason for this was largely covered in yesterday’s thoughts. Weak global growth is pressuring earnings which keeps investors focussed on the downside and thus of a mind to put their money in the safe haven assets of the USD and bonds. We saw a microcosm of this thesis last night in trade.
Initially markets were buoyed by Spanish news that it was going to screw its economy further into the ground by raising taxes and cutting benefits – even to unemployed – to the tune of €65 billion from the deficit by 2014. European share markets got a lift and the Euro was up trading to a high of 1.2296 with the Australian Dollar caught in the back draft and got dragged up to a high of 1.0280 before falling back a bit when the Euro reversed course. But at the same time German and US bonds are still at record lows – indeed the US had a reopening of one of it’s 10 year lines and it went at a record 1.46% and about 6 basis points below what traders were expecting with one of the best bid to cover ratios of all time. While the German’s sold 4.153 billion euros 2022 bond at an average yield of 1.31%, for the lowest rate ever.
Equally in the US, early sharemarket strength was reversed particularly after the FOMC minutes came out and showed that the economy is going to have to get materially worse before a consensus can be built for another round of monetary stimulus such as QE3.
“Several (members) noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the committee’s longer-run objective”
So the Fed, like the ECB, wont be doing anything sexy until it can build consensus and this is unlikely until things get materially worse. So we aren’t getting QE3 anytime soon and while the housing market recovery in the United State looks to be gaining some traction the risks are that we don’t get more stimulus prior to the US Presidential election in November which isn’t that far away really now – at least in political time. But in market time, that’s another thing altogether.
At the end of play the Dow was down 0.38%, the S&P 500 was flat and the NASDAQ fell 0.49%. In Europe it was a better night for Germany with the DAX up 0.24% while the CAC fell 0.57% and the FTSE was roughly flat up 0.1%.
On commodity markets though it was an interesting night in itself with Nymex crude up around 2.5% even in the face of bearish inventory data that showed a rise of 2.76 million barrels against an expected draw of 300,000 for gasoline and a rise of 3.1 million barrels for distillate versus an expected draw of 100,000 barrels. The CRB was up 2.15 to 290.79 with most of the drive higher provided by energy and copper which rose 0.96%.
In FX markets it was another night in two halves with the early USD weakness lifting all boats before the Euro reversed course and took many currencies back lower. Sterling reversed off trendline resistance fairly conclusively but the Aussie continues to be well supported. Perhaps in the current environment there really is a bit of safe harbour buying of the Aussie.
Just briefly in other news:
- Traders in the US are furious with the CFTC and the fact it seems to have missed the alleged fraud at Peregrine Financial. How does this stuff happen in 2012 after all the garbage that has been occurring in the past few years?
- In the US the trade data showed a narrowing for the second month in a row while the inventory data showed stock on hand relative to sales at the highest level in 10 months. This implies less stock buildup and thus a likely reduction in US growth.
- Dow Jones is reporting that EU Commission VP Olli Rehn is calling for Europe to buttress Consumer Confidence – easier said then done when austerity is still being implemented and biting hard and EU leaders seem unwilling or incapable of getting a clear conclusion to the Euro malaise.
- Further to my piece on Carrying the Euro yesterday the ECB released a report overnight saying that the Euro has retained its reserve currency status.
Lets have a look at some of the markets we follow.
Crude: I still retain a bearish bias overall and think that crude is looking for a move back toward recent lows but I was wrong footed by yesterday’s move higher. Seems for now we have an $84-89 range and a break either side might reward to go with.
EUR/USD: Interesting price action at the moment for the EUR as the sell-off seems to be losing momentum but is still biased lower.
AUD/USD: The trend following system is still long and will cut out if the AUD falls below 1.0150. The AUD is not going lower unless or until the trendline from the recent low below 0.96 breaks and you can see just how strong it is at the moment. The AUD bounced off this line on the dailies and 4 hourlies last night again so clearly traders are watching it. Seems only a matter of time, though, and a move below this week’s lows around 1.0153 will see a very short term system of mine go short and the sell off likely accelerate.
S&P 500: Bounced off support, or there abouts -this is a bellwether for global markets and needs to hold.
DATA: Consumer confidence a bit better yesterday but today’s labour force data is very important for Australia and the short term outlook of views toward RBA cash rate changes and the Aussie dollar .
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
Twitter: Greg McKenna. He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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