Stock, bond and FX markets surged higher overnight while the US dollar came under renewed pressure as comments by ECB President Draghi lit a rocket under expectations and hope of central bank action. Building on what markets thought they heard from Austrian Central Bank President Nowotny the day before, Draghi’s comments were all the traders need to hit and keep hitting the buy button. Jim Cramer would be proud, “Buy, Buy, Buy”.
Draghi was in London at a conference and said:
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
So of course Spanish and Italian bond rates fell, European equities rallied hard and the Euro was much stronger. The Madrid stock market was up more than 6%, the DAX was up 2.75%, the CAC 4.07% and the FTSE rose 1.36%.
Now you wont be surprised to see me pour cold water on this push higher overnight. It is not that I argue with the price action but rather the premise for the price action and the sustainability of the move on the back of more of the same from the ECB. Draghi’s comments are welcome, no doubt about that but we have been hearing promises of action from European Central Bankers and politicians for what is getting on to be years now – so I’m not yet convinced.
Add to this a technical thing I noticed in the price action of the Euro last night and by extension all other markets. Each day in London there is a price setting for FX rates that fund managers then use for their mark to markets, banks to settle certain transactions, and funds and investors who don’t want any MtM exposure to moves on the day will buy or sell at. Think of it as an FX version of LIBOR. Euro rallied hard into the London fix and then has done nothing since which suggests to me someone had a position to push – whether of not we get follow through we’ll see and I’ll look at the technicals below but this price action is a warning not to get too bullish just yet.
It wasn’t just Draghi though as the data in the US was on the very good side of good in the context of recent poor outcomes. Initial Jobless claims fell 35k to 353k and well below the expected result of 380k. Also out were Durable Goods which rose 1.6% against 0.3% expected. So at the close of play US stocks were also higher with the Dow up 211 points for a gain of 1.6%, the S&P 500 rose 1.6% as well to 1,360 and the NASDAQ was up 1.3% to 2,893
Commodities were only marginally higher in aggregate with the CRB up only 0.23 of a point. Crude rose 0.47% but the grains got smashed with corn, wheat and soybeans all sold heavily.
In FX markets it was risk on as the Australian Dollar trailed the Euro and Stirling higher and sits this morning just under 1.04. Like the Euro, the Aussie hasn’t done anything since the London fix and it has run into trendline resistance in this 1.04 zone. Taking a more helicopter view, these bounces are off very strong oversold levels and trend changes are not evident yet.
Lets have a look at some of the markets we follow.
EUR/USD: As noted, once Euro got through 1.2158 there was another 100+ points in it and so we saw a strong rally over night. 1.2330 is the key topside resistance and the sell zone from here to there on the day.
AUD/USD: The potential move toward 1.0350 which we thought was in the offing yesterday has been exceeded with the rally back to trendline resistance as you can see. 1.0420 needs to break for further topside momentum to build – I prefer to be a seller now.
DATA: The key for me in the next 24 hours is going to be follow on comments from Europeans and the Q2 Advance GDP data in the US tonight.
Here is today’s data and you can click here for the full week’s calendar. Please note that data coloured blue is important to me and that which is coloured red is important to everyone.
And here is how the markets closed at 6.00 am Saturday Morning courtesy of AVATrade
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.
Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility and you should consult your investment before making any investment decisions.