Macro Morning – Stocks surge

Stocks in Europe and the US rallied on Friday after the ECB bond spread target rumour hit the screens again and a letter from Fed Chairman Benanke to one of his congressional critics was was released to the press. In the  letter Bernanke said that the Fed had more room for monetary stimulus which in the week leading up to Jackson Hole buoyed markets that were already ebullient after the regurgitating of the rumour about the ECB.

You know I think that the ECB idea is as dumb as dumb can be and I can already see a hedge fund strategy that will make a fortune trading against the ECB – it just takes someone of size to push it. Likewise I think that Bernanke was simply restating the obvious but he has a divided Fed and can’t get the next lick of stimulus approved by his Board.

But that didn’t matter to markets and traders on Friday wanted to rally even though the non aircraft durable goods in the US were really poor. My view is a strategic one, these guys are existing in the day to day and just trying to make money. Not right or wrong, just is and the price action in both Europe and the US is probably going to be reinforced over the next few days as we head toward the big central banker conflab at Jackson Hole at the end of this week.

At the close of play the S&P 500 rose 9 points to 1,411 or 0.64%, the Dow rose 0.77% and the NASDAQ rose 0.54%. You can see the S&P has pulled back from the top of its trend channel but that Friday’s rally was a good one. For mine the technicals still suggest a retest lower aand the setup is similar to the Aussie Dollar’s recent reversal off the top of the channel.

In Europe the FTSE rose 0.11%, the DAX was up 0.31% and the CAC rose 0.02%. One thing to note on Europe is that with the return from holidays of German Chancellor Merkel we are also getting more aggressive comment from the Bundesbank about the plans of the ECB which reinforce they remain opposed to Draghi and his plan. Bundesbank boss Jens Weidmann is quoted in Reuters of the Draghi plan to bailout Spain and other nations:

“Such a policy is for me close to state financing via the printing press,” Weidmann told Spiegel. “In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks.”

Financing governments has long been a taboo for Germany. Weidmann’s predecessor as Bundesbank chief, Axel Weber, quit last year in protest at the ECB’s existing, but now dormant, bond-buying scheme – the Securities Markets Programme (SMP).

“We should not underestimate the risk that central bank financing can become addictive like a drug,” Weidmann said.

The battle continues.

In commodity markets the CRB was down for what felt like the first time in ages falling 1.2 points to 306.04. Even my old mate orange juice stopped rallying, falling 0.4% and the stops on my machine have been tightened up on this basis. Crude was off a little but not materially and we got some relative value changes in the ags with corn and wheat down around 0.7% while soybeans rose 0.95%.

Most interesting though is that gold DID close above the big old down trend line and might be set for a run – watch this space!

In currency markets the Aussie was under intense pressure on Friday and fell below the 1.04 level to a low of 1.0380ish which was a Fibo level and it bounced off there and now sits back above 1.04. I thought a break would see a run but the more ebullient mood in the stock market helped the Battler. Euro likewise battled back from the pressure it was under and the USD index is off its highs but it does look like it is going to respect that trendline we highlighted last week and which comes in around 81 today.

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

EUR/USD: Euro hit our target last week and has pulled back. Based on the combination of indicators I use, my sense is that last week’s high is going to be hard to break so 1.2580/90 will be solid and that Euro is more likely than not to test a little lower again this week. 1.2460 is first support and then 1.2421. A break of the highs sets Euro on a path to 1.2700-40:

AUD/USD: The AUD is under performing and has broken out of the 9 week uptrend. The push below 1.04 I thought would run toward  1.0250 – hasn’t happened yet but I think it’s coming. A push back above 1.0460 negates this negative outlook.

DATA: Nothing big in Australia today but the German IFO Business survey and the release of the Dallas Fed manufacturing index might give markets and excuse to focus on the weak economic outlook.

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 on 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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