FX markets in particular corrected recent weakness overnight but it is easy to be a bit baffled with what transpired. The Australian Dollar and Euro rallied, alongside a slight increase in European bourses yet Spanish 5 year bonds were trading higher than Spanish 10 year bonds which is usually a sign of an impending economic train wreck. The data from Europe last night was also pretty poor, actually very poor – yet if you just looked at the closes on a number of markets you would swear its all good.
Datawise the German IFO missed by a mile coming in at 103.3 versus 105.3 last month and the UK GDP was a shocking -0.7% contraction for the second quarter against market expectations of a fall of just 0.2%. GDP is now down 0.8% year on year with the falls accelerating. Europe rallied on the back of something the Germans, particularly Bundesbank President Weidmann, have consistently said won’t happen – the granting of a banking licence to the Euro Zone bailout fund, European Stability Mechanism (ESM) which would allow it to borrow and lever up its funds. Austrian ECB rep Nowotny said,
I think there are pro arguments for this, there are also other arguments, but I would see this as an ongoing discussion. It is not something that is only in the field of monetary policy, so this is part of a broad discussion.
Is this an endorsement and will the Germans be swayed? Doesn’t seem so but markets were clearly trying to reassert the paradigm where bad news is good news even though the days before bad news wasn’t good news. When markets have volatility and sentiment swings such as is occurring at the moment then price action becomes a second derivative not only of the data, but of the swings in sentiment and makes trading all the harder.
Some good earnings reports in the US overnight were counterbalanced by quite weak new home sales which fell 8.4% in June. The Dow closed up 0.47% at 12,676, the S&P 500 essentially flat down 0.03% to 1,337 and the NASDAQ down 0.31% to 2,854 under pressure from Apples (AAPL) miss yesterday morning our time.
In Europe the more positive feeling saw the DAX up 0.25% and the CAC up 0.23% while the FTSE was down a very small amount on the back of the weak GDP data. Even Madrid staged a rally, probably benefitting from the stories circulating that it is nearing a bailout – but wasn’t that bad news the other day?
On Commodity markets the price action in gold continues to point to a big break one way or the other very soon. The price last night found selling right on the downtrend line back into march and the bottoms on any sell offs recently have continued to be found at the bottom of the wedge. Watch this space. Crude and Gold are both supposed to have risen on the back of hopes of Fed stimulus together with “Middle East tensions” for crude. But this one has been trotted out a few times now so its probably just more buyers than sellers on the day. Some days there is no real explanation its just that – Crude has to get through $90.50 to kick higher. Copper was more than 1% higher and Corn, Wheat and Soy all surged again.
As noted above in FX Land the US dollar was under pressure and the Euro is up 0.74% to 1.2150 and the Aussie dollar up 0.88% to 1.0309.
Yep back above 1.03 – truly amazing with everything going on in the world and the weak and weakening global economic outlook. The Pound not surprisingly given the data was the only Major not to benefit from the US dollars weakness but it improved from the lows on the day below 1.5460.
Just briefly in other news:
- The currency war is about to hot up. Seems that Europe is starting to get used to a weaker Euro, they need it. The US dollar has actively been weakened and now the Chinese Yuan set at its lowest level for 12 months yesterday in Beijing. Watch this one.
- US Treasury Secretary Geithner is under pressure from the Libor scandal somehow but is disavowing any responsibility. This is an interesting slow burn mess.
- Ford gave a warning in its earnings announcement over night about Europe as it reported a profit slide to $1 billion.
- The man that build Citigroup, Sandy Weill, now calls for the break up of commercial and investment banks
Lets have a look at some of the markets we follow.
EUR/USD: Euro rallied but has been unable to sustainably get through the 1.2158 region we identified previously as resistance. On the day it looks like it might continue to struggle through there but if it breaks and holds for a couple of hours there might just be another 100 points in it.
AUD/USD: The move toward 1.01 never eventuated and the AUD reversed course and now sits at 1.0310. Dailies are mixed and rangy. On the 4 hour charts the Aussie rallied strongly as the MACD indicators suggested after the low yesterday post CPI and a potential move toward 1.0350 is in the offing. But for the first time in ages I wouldn’t have a position in this one today.
SPI 200: Still targeting 4015/20 but ultimately when/if that breaks 3950. We’ve had two days where the strong down and then up move have been reversed so there is a period of indecision at the moment and I’m not looking at this one as a short term trade.
DATA: The key for me in the next 24 hours is the Durable goods in the US.
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.
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