The Fed did as expected, at least by me, which was nothing. No stimulus, no QE not even exciting language holding out the prospect of stimulus to come. Indeed they highlighted the economic weakness in activity, in the unemployment rate, in slowly rising household consumption and the depressed housing sector yet the prescription for this economic malaise remains unchanged – super low rates till 2014 and continuing with Operation Twist.
The FOMC statement did say that it:
will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
The current Fed mouthpiece, John Hilsenrath of the Wall Street Journal, reckons the Fed signaled strong action ahead but to the extent that Jeffrey Lacker voted against even this action it still seems that Ben Bernanke may not have the numbers on the Board to move. Time and the depth of the US economic malaise will tell.
But the US dollar liked this result and it strengthened across the board. The Euro fell to 1.2220 from 1.2320 a few hours before and even the previously impervious Australian dollar came under pressure and is sitting at 1.0455 after making an aborted move into my resistance zone again in late Asian, early European trade. Somewhat uncomfortable for the shorts I recommended after we saw the Chinese and South Korean PMI’s yesterday but it did pull up in the zone so is still in the trade. Elsewhere the Pound got hammered after a really poor manufacturing PMI which printed 45.4 versus 48.6. Sweden on the other hand printed with a really strong PMI and the Krona rose against its European neighbours.
But for me, while we were all waiting on the Fed, the game was up much earlier in the night when it became apparent to even the most sanguine Europhile that Draghi’s brinkmanship was more panicked than planned. It was, of course, the almighty Bundesbank and its President, Jens Weidmann, who poured cold water on the idea of a banking licence for the ESM and a German government spokesman (and the deputy Chancellor) said that the Cabinet is united in its opposition to such a move as it takes away the incentive to reform.
A chairman should always be able to carry his board if he is going to make bold statements in public and ECB President Draghi but the evidence is mounting that Draghi mis-spoke. Indeed the Gaurdian in the UK has a cracking quote that sums it all up:
“I certainly would not say that we are just one of 17 central banks [in the eurozone],” the head of Germany’s Bundesbank said in an interview published on Wednesday. “We are the largest and most important central bank and we have a greater say than many other central banks in the Eurosystem. This means we have a different role.”
We’ll see tonight and the compression in the sovereign spreads of Spain and Italy to German rates suggest at least bond traders reckon Draghi can deliver. Fingers crossed for a surprise tonight, at least to me anyway.
In another example of stocks marching to their own beat, European bourses closed higher with the FTSE up 1.38% – certainly there were some stronger earnings from NEXT and Standard Chartered but with the PMI result, gee whiz. The DAX fell 0.26% and the CAC rose 0.91%.
Across the Atlantic it was a messy start to trade on US stock markets as one of the prominent market makers had some technical issues which saw a large number of individual stock prices cycle through big 10% ranges. The NYSE late in the day announced it was canceling these trades – quite correctly obviously – but disconcerting for investors nonetheless. Equally disconcerting was the price action on the do nothing Fed and the miss on the ISM manufacturing index which printed 49.8 versus 50.3 expected. It was marginally better than last time but US Manufacturing PMI fell to 51.4 in July with the employment index also easing. This helps explain why the volatile and often misleading (at least for the non-farm payrolls numbers this Friday) ADP Employment report’s big surge of 163,000 jobs was ignored. At the close of play the Dow was down 0.25%, the S&P 500 fell 0.29% and the NASDAQ was 0.66% lower.
On commodity markets it was a mixed night with nothing of note other than gold has fallen back inside the wedge it broke out of last week. Not sure what to make of this but if the US dollar is going to find support and the Fed doesn’t plan QE3 anytime soon maybe this was a bull trap.
Interesting/Other news:
- The IMF said that the downside risks cloud Japan’s economic outlook and further easing is necessary. Yeah sure, what and how will this work 20 years in?.
- It’s holiday season in Europe so don’t expect too much this month from policy makers. Indeed the IMF boss Lagarde said overnight that Europe needs to sort Spain out in September!!!!! Draghi?
- The MF Global Trustee reckons that customers will now get some cash back.
- Louis Bacon, boss of Moore Capital – one of the globe’s most prominent hedge funds, has acknowledged the difficulty in making money with a huge fund and is handing back $2 billion to investors to make his fund more nimble. This reinforces how good Ray Dalio and the guys at FX Concepts are.
Lets have a look at some of the markets that we follow.
EUR/USD: What is it David Gates sang in the ’70’s? Pictures and 1000 words and you can see here what happened when the FOMC sat pat and the Euro broke the uptrend. We were looking for a move to 1.2260 perhaps even 1.2223 and the latter is where the low was overnight, at least 1.2224 so close enough.
Short term 1.2215 is the 50% retracement of the recent rally and a break of this will see the 61.8% level in view at 1.2174. If that breaks then its all the way back to the recent lows. 1.2330 is resistance and then 1.2385/90. If the topside level breaks its on to 1.25.
AUD/USD: 1.0540/50 remained solid resistance for the AUD which was pushed higher in early European trade last night. It currently sits around the first fibo support at 1.0452 but it looks biased back toward the 38.2% retracement level of 1.04. If it gets through there then 1.0357 and 1.0313 come into view. I still favour the downside for the next half day and then we’ll see.
DATA: nnn.
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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