Markets closed higher in the US and Europe Friday buoyed by China’s GDP data that wasn’t anywhere near as bad as many had feared after the recent Peoples Bank of China rate cut. Coming in at 7.6% year on year Chinese growth was as bad as its been for many years but not as bad as it could have been. So markets rallied in Asia and the tide of more positive sentiment then lifted the boats of Europe and the United States bourses. The fact that Italy managed to get away the auction of bonds even on a day when Mooodys had hit it with a two notch downgrade was another positive result.
So by the end of the week all of the fear and loathing of previous days was washed away and the Dow and S&P managed to finish the week basically unchanged closing up 200 points or 1.62% and 22 points or 1.65% repectively on Friday. The NASDAQ was also higher up 1.48% while in Europe the DAX rose 2.15% the CAC 1.46% and the FTSE was up 1.03%. Our SPI futures suggest a stronger open on the ASX today.
In commodity markets the ebullience was shared with the CRB index up another 3.69% to 293.96 with every single one of the 16 commodities I follow higher on the day. Nymex crude was up 1.17%, gold rose 1.68%, Ags were up again as was copper.
On FX markets, ranges early gave way to a US Dollar retreat as the better mood in other markets weighed on the recent safe haven bid. The Euro found support in the mid 1.21 region before moving higher and the Aussie Dollar and Pound Sterling were both better bid and have an interesting week ahead of them as they retest overhead resistance from recent trend breaks.
Looking to the week ahead it is huge! We have meetings in Europe late in the week, again, including the vote in the Bundestag on the Spanish bailout (see comments below from Merkel) but the biggest event for the week is certainly Fed Chairman Bernanke’s walk up The Hill to present his semi-annual monetary policy report to congress. Given that the ebb and flow of markets seems tied to the ebb and flow of expectations about the chances, or not, of the Fed instituting QE3 at some point any hints Bernanke gives will be awaited with bated breath by the markets.
On Friday we heard from another FOMC voter, Lockhart, who seemed to be moving toward more monetary stimulus in a speech he gave. But can we really expect Bernanke to go to far just yet given what we saw in the minutes of the last FOMC recently? The US economy has patches of weakness but also patches of strength and even though some of the data was OK last week and the Citibank Economic surprise index improved marginally overall, data is still printing weaker than expectations which is perversely positive for markets, which are addicted to quantitative easing (please see the Wrap in Macro Investor this week for more discussion on this). But whether or not Bernanke alludes to more QE or not will likely be an important driver of markets mid week.
Equally important is earnings season, which continues this week in the US with literally dozens of companies reporting. The question for markets, and one the Citi Surprise index suggests may be the case, is whether or not markets and the commentariat have become too pessimistic and thus factored in all the bad news. It’s starting to look that way and companies are certainly doing a bit of “expectations management” with Reuters reporting that “negative to positive guidance” is at 3.3:1 which is the worst slant since 2008. But we’ll just have to wait and see how the results flow.
Just briefly in other news:
- German Chancellor Merkel over the weekend said she has the numbers in the Bundestag to get approval for the Spanish bailout on Thursday but added that the decision on whether states were liable for bank bailouts via the EFSF and ESM had yet been made. Reuters reported that Merkel reiterated the staunch German view that you don’t get the cash without oversight and supervision from Brussels,
“All attempts … to say ‘oh let us practice solidarity and nonetheless have no supervision and no conditions’ will stand no chance with me or with Germany,”.
- JP Morgan beat estimates of a weak result on Friday even though earnings fell over the previous year’s result.
- The Libor issue is getting bigger with more investigations and recriminations.
- US PPI was up 0.2% for it’s first rise in 4 months and much higher than the -0.3% expected. Put this in the anti-QE column but watch CPI this week.
- Bundesbank President Weidmann said that Italy does not need a bail out.
- Dow Jones reported that Spanish banks borrowing from the ECB hit a record in June at €337 bln up 17% from May.
- Barrons put a picture of the Euro at 1:1 with the USD on this week’s cover. Time for Euro bounce? Maybe!
Lets have a look at some of the markets we follow.
Gold:Wedging itself into a decision about its future. Both shorter term trendlines have enough touches to go with the break in a trading sense. Watch this one as an indicator for the US Dollar.
EUR/USD: As I noted Friday – I wasn’t overly bearish this pair heading into the weekend even though I have 2 systems short Euro at present from 1.24 and 1.2280. The Euro did as expected and rallied as you can see in the daily chart above. The 4 hour chart looks a little overcooked so it might just be a quite day in Asia. The Euro is currently at 1.2260 trying to break back inside the previous range – my subjective indicators suggest that even though the market retains a bearish bias a rally toward 1.24 is possible on the week.
AUD/USD: Trend following is sometimes very problematic in the short term even if its longer term results are spectacular so the close of the long and the open of a short on the Aussie over the last week would seem to show. My subjective trading was much better over the week.
As you can see the Aussie has regained the trendline that it broke down through last week on Friday night and then again in this morning’s trade. Very choppy at the moment and I’d leave this alone until I can see some clear signs to buy or sell on the short term charts. On the dailies it looks like the Aussie might head a little higher yet.
S&P 500: As I noted last Friday the weekly close was important for this week’s direction and as the S&P clawed back inside the up trend channel the outlook is more positive on the week – at least intially .
DATA: US CPI, RBA Minutes, Bernanke’s walk up the Hill and the raft of earnings reports are key for me this week.
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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