Stock’s tanked and the Euro got slammed after Mario Draghi failed to deliver on the promised shock and awe. Our premise has, of course, been that this would be the outcome as the almighty Bundesbank is the vote that really matters and he hasn’t and possibly wont get it.
The ECB said:
The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective…Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.
You can see the issue here, it’s obvious. After promising to “do whatever it takes” to save the Euro and saying “believe me, it will be enough” last week Draghi raised expectations of action but all he could deliver was MAY.
No surprises then that European stock markets were sharply lower with the DAX down 2.20%, CAC off 2.68% and Madrid down 5.09% and Milan off 4.64%. The FTSE, like stocks in the US isn’t so impacted and it only fell 0.88%.
The big casualty though is the bond markets and even though Spain got an auction away today of about € 1 billion, rates got slammed higher on the day and are now back above 7% rising 43 basis points to 7.165%. Italian rates were also higher rising 40 basis points in the 10’s to 6.33%.
This is the key point as these markets are the hot spot in the fight for the Euro and market sentiment. It is for this reason that I give Mario a FAIL – I just want to scream at how badly Draghi seems to misunderstand markets and the implications of his words. It’s the Dunce’s hat for him.
We now have a month of European holidays that provides a vacuum in which markets will do as they will. The only upside is that many northern hemisphere traders will also be on holidays.
In the US, stocks weren’t off as much with the Dow down 0.71% to 12,878 and the S&P500 of 0.75% to 1,365 while the NASDAQ dropped 0.36% to 2,909.
Commodity markets were hit hard by the combination of the big two central banks disappointments and the continuing erosion of the outlook for global growth as manufacturing PMIs almost universally fall. The CRB dropped 4.73 pts to 294.50. Crude was down 1.83% to $87.31, gold dropped 0.91% as expectations of monetary and US dollar debasement recede for the minute. Watch 1560/64 on the downside given gold’s recent failed break higher. Dr Copper was also lower losing 2.30% overnight.
In FX land the Euro was under intense pressure making a low of 1.2135 having made a high of 1.2399 just before Super Mario took the podium. That is not pretty, and although the Euro has stabilised 50 points the pressure remains to the downside. The Australian dollar was also hit but the 1.0440/50 region remains well supported while the Pound was also under pressure from the spiking US dollar.
Interesting/Other news:
- US data was a little weak with factory orders down 0.5% in June against expectations of a rise of 0.5% and jobless claims up 8,000 to 365,000.
- Shares in Knight Capital, the company that was the source of the glitch yesterday on the NYSE, fell 63% overnight. Facebook also was down again.
- China’s central bank said yesterday that it will make stabilising the economic growth outlook its main priority. The details were part of the quarterly monetary policy report and shows the growing concern in Beijing over the economic slowdown.
Lets have a look at some of the markets that we follow.
EUR/USD: I’ve used the daily chart today so you can get an opportunity to see the overall direction of the Euro even as it is trading up and down like a yo yo. Indeed the average true range for the past 20 days is 106 points. Euro traded through almost 300 points overnight. This means time for smaller positions as a risk management tool.
Anyway, Euro looks ugly and biased back toward 1.2040 and then 1.18.
AUD/USD: AUD continues to find support at 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 a move toward 1.02.
DATA: AiG Performance of Service Index in Australia and then China services PMI before the big number for the week in US non-farm payrolls.
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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