Perhaps markets aren’t moving on the second derivative of bad news after all. Perhaps the spectre of QE3 is setting up a positive bubble for stocks insofar as good economic news is good news and bad economic news is good news because it moves us all closer to QE3. I don’t know yet, time will tell, but the reaction to the strong housing starts (+6.9% in June at 760,000 annual rate – highest since October 2008) in the US overnight suggests that this might be the case.
Also buoying markets was some more up beat earnings we saw overnight. But there is also a warning in the numbers we are seeing from the likes of IBM, after the bell, which show profitability on weakening earnings. On of my mentors, Stevie G, used to say “show me the cash flows” not the published profits. So with Gary Shilling saying that the 3 months of retail sales decline (which I forgot to cover yesterday – apologies) suggest a US recession and revenues contracting then this might just be a positive bubble for stocks after all with the guts of the numbers suggesting a risk for markets in the future.
But for now the market is positive and traders will continue to trade that way – until they stop. Markets really are perverse sometimes – and economists reckon that humans aren’t involved in the economy! Yup, got that right boys!
Equally perverse is the duality of Angela Merkel’s approach to this Eurozone crisis. Overnight she made comments that suggest once again that we have a long way to go in a Eurozone resolution. Perhaps she was managing the vote at home in the Bundestag tonight, I’m not sure but the Euro got smashed again on the back of her saying:
We have not yet shaped the European project in a way that we can be sure that everything will turn out well, we still have work to do,
Helpfully, she then added the other side of the coin saying that she was “optimistic that we will succeed.” The Euro was under intense pressure as a result falling to a new all-time low against the Australian Dollar, three and a half year low against the Pound and an eleven and a half year low against the Swedish Krona. But once again the Euro found solid support around the 1.22 region.
In other FX news the Australian Dollar only knows one way at the moment and sits at 1.0366 as I write. News yesterday that the Czech’s are buying Aussie was just more confirmation that investors are still looking for somewhere else to put their cash and that overall perception and thoughts toward Australia, our bonds and our currency continue to be favourable. Sterling had another weird session closing essentially unchanged but with a really long legged doji on the candle. Perhaps a reversal is coming?
So at the close of play Stocks were higher across the board on the back of better earnings and stimulus hopes with the Dow Jones up 0.81% to 12,908, the S&P 500 up 0.67% to 1,372 and thee NASDAQ up 1.12%. In Europe the FTSE rose 1.01%, the DAX rose 1.62% and the CAC was up 1.84%. Pretty much every stock index around the world was up overnight so the ASX is going to open much stronger this morning.
In commodity markets the CRB rose 3.44 pts to 299.08. Ags were up again with corn, wheat and soybeans up 1.66%, 2.02% and 1.82% respectively. Copper was up about 0.5% and oil continued higher again rising 0.75% on the back of the Middle East problems.
Just briefly in other news:
- The Fed Beige book was pretty downbeat on the economy saying that while the US economy had expanded moderately but that jobs growth was tepid.
- Keep an eye on the Middle East and oil. There was a big hit on the Assad regime in Syria overnight taking out key officials and Iran continues to simmer, let alone the fact that the Israeli PM blamed the Iranians for the bus bomb on Israeli tourists in Bulgaria overnight. While this isn’t an ad for Macro Investor, Michael Feller is writing about oil this week and I for one look forward to his insights.
- The UK Telegraph reported that the IMF said the Eurozone was in critical danger and needs more monetary stimulus including QE.
- Germany’s parliament votes tonight on the bailout package.
- After the bell IBM reported profit up 5.9% but missed revenue – Stevie G would not be pleased.
Lets have a look at some of the markets we follow.
USD Index: the past 24 hours reinforce my view that the Euro is trying to bottom and the USD Index is biased back toward the trendline support we highlighted yesterday around 82.40. This is important because a weaker USD sees stronger commodity prices and during the past few years has also been coincident with stock strength.
EUR/USD: Euro is trying to base and my subjective indicators suggest that even though the market retains a longer term 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: Yesterday we said the target for the AUD was 1.0325/30 and when/if that got taken out the next level is 1.0465/70. So, given the AUD took out resistance and is now back above the 200 day moving average it seems it is biased higher.
SPI 200: 4157 remains the target as suggested yesterday. Support in the 4095/4105 zone and below that 4080/88.
DATA: Quarterly business confidence from NAB is important today as it is a bigger and more comprehensive survey than the usual month one. In Europe its the vote in the Grman Parliament and then in the US Philly Fed and more housing data.
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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