During out Macro Investor weekly strategy meeting yesterday I said I thought Fed Chairman Bernanke’s address overnight would reflect the fact that the US economy is hitting a rough patch again but that he was unlikely to be able to signal QE3 because he doesn’t have enough votes on the FOMC at the moment. The corollary of this was that I thought the markets were likely to be disappointed and the US Dollar would strengthen and stock markets would sell off.
That is exactly how things played out overnight, but only initially. After Euro ducked below 1.22 again, after the S&P dipped below 1340, and after crude dipped back below $88 Bbl, markets reversed course and unwound these moves entirely.
How this makes sense when Helicopter Ben left his transport parked on the tarmac is hard to fathom at first blush but then again he did hold out hope that the Fed would eventually be back, saying that they would do whatever was needed when needed. But he stuck to the script we saw in the recent minutes which reinforces the notion that he hasn’t yet got the numbers, or the will, to move decisively just yet. Bernanke said:
Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action
I saw Bernanke’s testimony characterised in a Wall Street Journal article as a “dour view” on the economy but that stocks had rallied back on “residual” hopes that the FOMC will eventually be forced to come to the table with more easing. I like the way this is framed because it highlights the fact that stock markets, and many others tied to them, are now trading as second derivatives of what is actually happening.
That is bad news is good news because bad news, assuming its bad enough, will push central bankers closer to more monetary stimulus and the hope is that the Fed will come back with QE3. But equally good news might just be bad news because it pushes QE3 further away.
See it’s easy! Well, not really, but for me it almost guarantees the kind of rangy trading we have been seeing for a while now. Clearly stock market traders seem more predisposed to hope than fear at the moment so this will be the bellwether view for many other markets.
At the close of play the Dow was up 0.62% at 12,805, the S&P 500 up 0.74 to 13,363 and the NASDAQ up 0.45% to 2,910. As you can see in this 15 minute chart of the S&P 500 from my AVA trading platform it was a very solid turnaround. Across the pond the FTSE was 0.59% lower, the DAX was uo 0.18% and the CAC down 0.9%. In European bond trade Austria joined the zero interest rate club with its 2 year bonds hitting this level overnight. On Commodity markets Nymex crude jumped sharply from intraday lows rising 0.71% at the end of the day. Gold was off 0.58% to $1,582 oz which is perhaps a better reflection of the chances of QE3 any time soon. Copper was also lower down 0.58% also but its weakness was tempered by the rise in US industrial production for June of 0.4% versus the 0.3% expected and US Home builders confidence climbed at its fastest pace in over 10 years rising from 29 to 35. Ags were flat and the CRB roughly unchanged.
On FX Markets the US Dollar’s strength was reversed pretty swiftly with the Euro bouncing over 1 cent from its overnight low. The Pound had a similarly spectacular recovery and the Australian Dollar just kept on keeping on. The Aussie rallied into the release of the RBA’s minutes yesterday which showed there are no rate cuts here in Australia any time soon and probably not without a material deterioration in the economic data which gave it further impetus to drive up through 1.03 before pulling back on US Dollar strength to the mid 1.02 region. It now sits at 1.0314 as I write looking biased higher.
Just briefly in other news:
- Bloomberg reports ex-Fed boss and central banking god Paul Volcker said Bernanke hasn’t got a magic bullet. Yes we know but that doesn’t stop the market hoping.
- US consumer prices were flat in June however the core CPI did rise 0.2%.
- ZEW German business sentiment index was weaker for the 3rd month in a row but this was less than forecast and the compiler of the survey said there may be signs of a bottom.
- According to Dow Jones Finland has agreed a collateral deal with Spain for its part in the bailout – good job the Finns!
- The Irish have somehow found €2.25 billion that they are going to spend on economic infrastructure stimulus measures for the troubled economy without adding to the overall national debt burden.
- Greece is seeking a bridging loan to cover next month’s maturing bonds according to the Wall Street Journal – ugly!
- HSBC’s head of compliance resigned overnight at an inquiry into money laundering.
- US Tic data showed that China is still the number one holder of US Treasuries and is still buying.
Lets have a look at some of the markets we follow.
USD Index: the last 4 days of trade have been very bearish for the USD in the context of its recent rally and suggest further downside probably back toward 82.34 trendline support from the current 83.08. This accords with the view expressed Monday about the prospects for the Euro and Aussie:
EUR/USD: Not much change from yesterday with Euro 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. 1.2365 is the 38.2% retracement of the July selloff. Suppport remains 1.2160/90:
AUD/USD: The AUD is holding up really well all things considered and even though the short term charts look a little over cooked the target now for the Aussie once, if, 1.0325/30 gets taken out is 1.0465/70.
SPI 200: This one pushed through resistance yesterday and now has a target of 4157 in sight. We can also see a distinct uptrend line now on the 4 hour chart which should support in the 4080/88 zone and was resistance I noted yesterday.
DATA: I’ll be watching the Westpac Leading Index today for Australia and everyone will be watching Chinese property prices. More data in the US on housing which looks like the real obstacle to the next round of QE – keep an eye on how this part of the economy recovers, or not.
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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