This is the week when we find out if the European crisis has reached a point where central bankers and politicians are finally going to deliver on what to now have been very hollow promises. As Delusional Economics wrote last week, perhaps the PMI results in Europe and then the push higher by Spanish and Italian bonds has taken the crisis to a phase where Europe, and critically Germany, understand that they simply have to do something.
Or is it just another bluff, another kicking of the can down the road, another mistruth spoken to calm market and hold out the hope of a resolution so that these same central bankers and politicians can go on their summers holidays as we roll into August?
The key to the turn around last week was the promise of decisive action from Draghi which was followed up with comments of support from German Chancellor Merkel and French President Hollande. And why wouldn’t the politicians support this move – a poll over the weekend showed that less than one in three Germans agree with Merkel’s handling of the crisis and that 48% are opposed. So if the ECB can use its balance sheet to buy bonds then in many ways Merkel is off the hook for a while in needing to use the German balance sheet.
But the Bundesbank won’t see it that way and reports that the ECB President Draghi was to meet Bundesbank President Weidmann have the markets holding their collective breath. It’s the make or break meeting for this plan and in a sense for the rally we saw late in the week.
So the stakes are high – very high. Another European let down will send them reeling back to last week’s lows and below. For the moment we will give the central bankers and politicians the benefit of the doubt, as have markets, but there is plenty of data out this week on which sentiment might also turn.
Strap yourself in for a big week of hope, fear, data and central bank decisions and don’t fight the tape. There is some seriously pent up hope for central bank action so if it arrives its best to either hitch a ride or get out of the way initially. If you are ultimately a believer that fundamentals will win out there will be a time to sell.
Just briefly on the markets trade Friday night.
US GDP data was weak at 1.5% and largely paced by personal consumption. This was a poor result but does increase pressure on the Fed to come back with QE3 at some point. This week’s meeting is probably too soon and my personal view is it wont be until after the election in November but bad news is good news.
So, at the close, risk markets were universally higher. The Dow was up 188 points to 13,075, the S&P 500 up 1.9% to 1,385 and the NASDAQ up 2.2% to 2,958. In Europe the FTSE was up 0.97%, the DAX 1.62% and the CAC 2.28% while Madrid continues to its recovery rising 3.8%. In the six trading days including the previous Friday the Madrid stock exchange fell and then recovered around 10.5% – some volatility.
On commodity markets, the CRB was up 2.13 points to 299.60 with crude uo 0.82% to $90.12 Bbl, copper up 1.16% and the grains continued their recent volatility with corn and soybeans both rising 2.14% while wheat was up 1.56%.
In FX land, the Euro rallied on the Le Monde story but gave back much of the gains late in the day but the Aussie dollar was strong and remains strong sitting at 1.0480 as I write. The primary driver of the Aussie’s strength is the positive feedback loop of relief and hope for the ECB intervention in the Spanish and Italian bond markets, hope that the Fed might be coming with QE3 and the impact that this will have on asset markets and then the weakness these two factors have caused in the US dollar. Unlike previous periods when weak global growth allowed the Aussie to weaken and so insulate the Australian economy from this weakness it seems unlikely that unless we get a catastrophe that the usual shock absorber is going to work – something the RBA needs to think about.
Lets have a look at some of the markets we follow.
EUR/USD: Quite indecisive price action for the Euro over the last day with a big rally but a close mid range. The reversal we then saw on the 4 hour charts is potentially a sign Euro is just not ready to break through the 1.24 region yet. 1.2280 is support on the day and if this break we’d be looking for a 50 point fall.
AUD/USD: Selling into the 1.0420 zone hasn’t been such a great idea given the AUD is sitting atop 1.0475 at present. This is a 100% retracement of the run that took us all the way down below 0.96 in late May and Early June. If it can get back through here and hold for a day then 1.0850/60 comes back into view. Subjectively this does not feel right but who can argue with the price action.
On 1 and 4 hour time frames the AUD looks overdone. 1 day it’s in a good uptrend but with no real direction in terms of momentum and the weeklies are suggesting it might get a little more oomph. Yuk – trade the time frame that suits is all I can say and good luck as it is a big week for markets so it is a huge week for the AUD given the multiplier feedback loops that drive it.
DATA: This is a huge week of data and I would encourage you to click on the link below. Highlights for me are EU confidence data tonight, private sector credit in Australia tomorrow, building approvals as well. Tomorrow night we have the employment cost index, personal income and spending, US PCE deflator, Case Shiller House data and Chicago PMI and NAPM for Milwaukee.
As we roll into August on Wednesday we have the HSBC Manufacturing PMI for China, ADP Employment change to give us a glimpse of what non-Farm Payrolls on Friday night for the US might bring. We also have central bank meetings and decisions in the US and Europe. If there is going to be co-ordinated attack on markets this is the week.
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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