Macro Morning – Reality bites

Stocks in the US didn’t like the combination of a  couple of my longer term themes last night. So today it’s time to focus on the economic reality not the fund managers positioning or mind set. Those two themes are enduring weak aggregate demand in the globe and QE3 coming later rather than sooner.

Dealing first with demand, we know that PMI’s are not the whole economy, our beloved central bank Governor Stevens has told us so, but the release of the HSBC Flash PMI for China showed some really worrying signs of an acceleration in its deterioration. It has covered in the blog yesterday and you can find Zarathustra’s piece here. As Europe entered the fray their own PMI’s were released, it spells more trouble ahead. You can read DE’s piece from this morning here for a full coverage – adult beverage suggested even at this early hour.

I want to give you a glimpse into the future and the death embrace that Europe and China are in and by extension the world and all of us here in Australia. In the Fixed Income section of Macro Investor this week I included this chart – it is one that I have been using for ages and it suggests to me that as China slips lower, and as the Chinese increasingly show a proclivity not to re-stimulate their economy. Germany and Europe are going lower too. Recession looms large on the horizon for Europe and then stagnation for a long time after that. So as the Euro rallies we are preparing ourselves to sell it once again.`

In the US the PMI was a little better than expected showing a slight rise and still above the 50 line so a mild expansion. Good news.

Bad news though, for the QE3 bulls came overnight from Fed Governor Bullard who according to Reuters:

…leaned against the impression that the U.S. central bank was locked into easing monetary policy at its meeting next month, noting that economic data had improved in recent weeks.

“I do think that the minutes are a bit stale because we have some data since then that has been somewhat stronger,” Bullard, who will be a voting member of the policy-setting committee next year, said in an interview.

There remains at least one member of the FOMC who doesn’t want to proceed with QE3 – the minutes told us that yesterday. Indeed we know that the FOMC itself doesn’t think they need QE3 – otherwise they would have done it. So at the risk of looking stupid when I do think the US economy is deteriorating again I don’t think QE3 is going to happen anytime soon.

At the close of play US stock markets were unimpressed with the Dow tumbling more than 100 points to 13,057, the S&P lost 0.81% to 1402 (remember the trendline top its rejecting my tentative target is 1350/60) and the NASDAQ dropped 0.66%. In Europe things were ugly too although the  the FTSE ended around flat up 0.04%. On the continent the DAX dropped 0.97%, the CAC lost 0.84% and Madrid lost 0.76%. Spanish bonds rose another 7 basis points as talk was that Spain is having pre-meeting meetings with its European counterparts before asking “officially” for a bail out.

On commodity markets the CRB moved only a little but the internals were fraught again. OJ surged another 5.56% – what a trade, what a trend what a system! Crude dropped a couple of dollars a barrel from the high overnight as the stimulus was questioned and no doubt some thoughts on underlying demand are weighing. The grains were quiet for a change.

Silver was up 2.71% but on gold yesterday we said “watch the $1,665.50 level for resistance or a break” and the price move overnight in gold as you can see here in this chart is now at/through that level with gold at $1670 oz. I’m going to use a weekly close filter and say if gold closes up here and above the line this time tomorrow then it has broken.

We’ll update you Monday in Macro Morning.

In FX land the USD is under pressure but yet to break or test the 80.90 level we have identified as crucial. Euro is a little higher at 1.2561, Sterling roughly unchanged and the Aussie Dollar is doing as expected and lagging. It has pulled back materially from the highs above 1.05 and sits this morning at 1.0440 – sentiment is turning for the battler.

Lets have a look at some of the markets we follow using our AVATrade trading platform charts.

EUR/USD: Euro pushed up to our target of 1.2572 overnight making a high of 1.2586 before pulling back to sit at 1.2561. If it can close through last nights high tonight then its on toward 1.2740/50 but it feels to me that this might be a little hard – we’ll see. :

AUD/USD: The AUD is under performing and is gradually breaking out of the 9 week uptrend. A push below 1.04 is needed to head toward 1.0250 – I think its coming.

DATA: Glenn Stevens is before Parliament today – expect questions on the mining boom and the Australian dollar so we could get some trading catalyst today.

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 6.37 am this 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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  1. Thanks again Greg.

    I wonder if the markets also reacted to Romney saying he would not reappoint Bernanke, and that he did not support QE3.

    To add my 2c, the ASX 200 charts are set up perfectly for a big decline starting now. Admittedly we’ve had other strong bearish set-ups in recent months and seen no immediate follow through, with the pattern continuing to morph. In any case, I choose to take these things at face value, not second guess them, and the current set up is compelling:

    • Deus Forex Machina

      Yes – very ugly potential reversal candlestick on the SPI Futures (the market i watch) on the weeklies. Dailies look even worse fall below 4320 and its over.

  2. Someone posted the other day ‘that the world wants to sell this rally’. If that reflects a desire rather than the books ( ie: who is actually short out there?), then any downturn could turn into a route as those that wanted to short, and didn’t chase like fury.

  3. god you guys are bearish. one -0.8% move and its “reality bites”.

    I would say the past 2 months has been the real reality bites….the permabears on the backside

    • Deus Forex Machina

      Yeah yeah GB, whatever!

      Perhaps if you read every day you might see that we are riding up and down with the market, this is aa daily note, perhaps also if you recognised why the markets came off and the dichotomy between price action and the economy you might see a dose of reality is healthy – also it fits with the technicals as the S&P hit a trendline brick wall the night before as I pointed out – doesn’t mean its going to 600 though

      Take a chill pill – its a headline for gods sake – this is a marketing business as much as an information business. No sense writing good stuff if no one reads it.

      So GB, thanks for reading and have a great day


  4. Greg,

    Do you or do you know of anyone who has come up with some figures as to how big the next QE has to be to keep the market at this level, let alone go higher ?