An interesting night for FX markets. Early Euro weakness on the news that ECB President Mario Draghi wanted bond holders to suffer losses on senior bonds issued by some of the Spanish banks reversed on weak US retail sales and more hope from the market of QE3. The retail sales numbers were poor with the market expecting a rise of 0.2% but getting -0.5%. Given it was the third fall in a row for retail sales it triggered a raft of GDP revisions from pundits for the US economy and increasing the hope of quantitative easing – sooner rather than later.
The other key release overnight was the IMF downgrading its forecast for global growth this year but before I get to that let me plug my article in Macro Investor on quantitative easing and the market love affair with it. If you haven’t read it or the rest of this great publication I’d encourage you to have a look.
To the IMF World Economic Outlook which said that they now believe growth in 2013 will be 3.9%, not 4.1%. We see in the thought process that drove this downgrade the creeping economic impact of the Eurozone crisis on the rest of the world. As Delusional Economics said last week the economic slowdown has rolled past Europe and is impacting the US, the recent engine of global growth, emerging markets and China. On this the IMF said:
Growth has slowed in a number of major emerging economies, especially Brazil, China, and India. This was due both to a weaker external environment and a sharp deceleration in domestic demand in response to capacity constraints and policy tightening. Overall, though, emerging markets have weathered the crisis well.
For the US the warning was one about economic troubles ahead stemming from “excessive fiscal tightening and political gridlock”:
“In the extreme, if policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts,” the U.S. economy could face a steep decline of more than 4 percent of GDP in its fiscal deficit in 2013.
Against this backdrop its hard to think that Chairman Bernanke won’t at least leave the door open to more monetary stimulus when he addresses the US Congress tonight. Markets will be under intense pressure if he does resist.
At the close of play on share markets the Dow was down 0.39% to 12,727, the S&P 500 fell 0.23% to 1,353, the NASDAQ dropped 0.4%. In Europe the big indices, the FTSE, DAX and CAC were 0.1% either side of a flat result but the Spanish market fell 2% on the ECB news noted above and Spanish 10 year bonds rose 16 basis points to 6.81%.
In commodities, the hope of stimulus from QE3 but also from China after Premier Wen said that China would step up efforts to boost the economy boosted copper which was initially under pressure from the slowing global growth outlook. Oil rose on the hope of stimulus and some military tensions when a US Navy Ship fired on a fishing boat that approached in the UAE. I’m guessing some contract expiry in Brent may have played a role as well. Wheat and corn were through the roof as the US drought worsens and gets more coverage both rose more than 4% and the CRB finished up 2.02 points to 295.98.
In FX markets, as discussed above, the Euro found support after early selling and rally over a cent of the lows as the weaker retail sales pressured the US Dollar lower. This USD weakness was particularly obvious versus the Yen with USD/JPY falling to a low of around 78.60 before recovering. Sterling was sharply higher as was the Australian Dollar. Are we seeing the future of the Aussie under QE3? It’s strength against the US Dollar and on the crosses is remarkable given that the usual drivers such as the growth and interest rate outlook would suggest the Aussie should be going lower.
Just briefly in other news:
- Citibank’s profit fell 12% but still managed to beat estimates by analysts. This is an interesting dynamic in markets and always something to watch.
- WTO found against China saying that is discriminated against US credit and debit card issuers.
- Is this a signal that German Chancellor Merkel is trying to distract her population? Dow Jones reports that she has urged a new Kyoto Protocol on global warming.
- Moodys has cut the rating of 13 Italian Banks this morning.
- Global fund manager BlackRock also downgraded its view of the economic outlook saying the chances of stagnation have increased to 45% for H2 2012. The question they asked, and one to ask yourself, is where will the growth engine of the world be?
- Macquarie Economist Brian Redeken is quoted in The Age saying that unemployment will top 6% next year – I hold the same view.
Lets have a look at some of the markets we follow.
Corn: What a rally. Obviously not good that so much of the US is in drought but this chart and wheat shows how and why a diverse portfolio of markets using a trend following system can work. The results on these trades have been spectacular.
EUR/USD: Euro is trying to base and my subjective indicators suggest that even though the market retains a bearish bias overall a rally toward 1.24 is possible on the week.
AUD/USD: As I noted yesterday I thought the “Aussie might head a little higher” and so it did in the past 24 hours although it remains below the uptrend line it has broken down through last week. The Aussie will roar if markets get a hint of QE3 from Chairman Bernanke but likely get slapped if he keeps his silence or tows the party line from last week’s FOMC Minutes.
Technically support near term is at 1.02 and resistance 1.0280.
SPI 200: needs to get through 4088 and 4103 to kick on otherwise its lower again. Given its mid range of this megaphone I have no real conviction on the day other than lower intially.
DATA: This next 24 hours is very important to the next move in market direction with Chairman Bernanke walking up the Hill to address Congresss on monetary policy with markets waiting with bated breath for hints, that’s all we need, on QE3. But before that we have some other important data. In Australia we have the RBA’s July minutes, Motor Vehicles for Australia, the ZEW survey for Germany and the Eurozone and then CPI, IP, NAHB Housing and tomorrow morning the Fed’s Beige book. BIG 24 hours.
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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