Sentiment swung so violently between Thursday and Friday’s that my head is spinning.
What changed was not so much a stronger than expected non-Farm Payrolls in the US which rose 163,000 but rather a raft of press reports reconfiguring thoughts on what ECB President Draghi actually achieved with his brinkmanship over the past week or so. The consensus seems to be that he laid out a framework through which European governments in general and Spain in particular can access a rescue. Also The Economist argues that he did it this manner so as to ensure there is no possibility of backslide from these governments
Clearly I don’t think that the Bundesbank is going to roll over but many now believe their opposition will fold or be immaterial in time. Also clearly, I believe that a weak economy will eventually weigh on asset prices as earnings disappoint in time.
But that is not the verdict of the stock market, nor the Aussie Dollar which continue to defy’s the slings and arrows of European and economic misfortune and hold up better than could have been expected based on historical norms and this current economic outlook.
It’s times like these when trend following systems really win out and shine. Regardless of my rhetoric my trend following systems are long of Aussie at the moment and close to going long on a number of equities if the breakout continues.
A Reuters report on the week ahead said this morning “the force is strong with this stock market”. Why so strong? Here’s an example quoted by Reuters:
“There’s still a fair amount of pessimism, but equities are so much more attractive than bonds that the dividend on Johnson & Johnson (JNJ.N), for example, offers a better yield than the company’s bonds,” said Bruce Zessar, managing director at Advisory Research in Chicago, which oversees about $9 billion.
That’s the point of zero interest rates and QE – get the money deployed into risk assets and one of the reasons stocks in general have held up so well in face of the European malaise.
So to the markets on Friday night the FTSE was up 2.2%, the DAX up 4%, CAC 4% also Madrid rose 5.6% and Milan rose 6.34%. Spanish 10 year bonds rallied 31 points with the Italian 10 year dropping 28 points. In the US the Dow was up 1.6%, the S&P 500 1.9% and the NASDAQ up 2%.
On commodity markets there was a surge in the CRB index which rose 6 points or around 2%. Crude bounced 4.67% to $91.40 bbl, Dr Copper rose 2.26% and gold was up 1.15% to $1,607 oz.
Certainly the US dollar’s tumble would have helped these commodities given they are denominated in USD’s. The Dollar Index fell 100 points to 82.35 Friday and looks biased a little lower toward 81.50 this morning. The Euro rallied back to 1.2396 on the close and the Australian Dollar is up at 1.0570ish and looking well supported still.
Looking forward this week we have the RBA meeting and a raft of global industrial production data. We have a bit of a vacuum in terms of Europe so sentiment might swing around a bit on this but momentum seems to be with the stock and European bulls as I write this morning.
Lets have a look at some of the markets that we follow.
EUR/USD: “Up and down like a yo yo”. When I wrote that Friday and noted the huge range Euro had traded through on Thursday I didn’t expect a repeat Friday but as Mandelbrot says volatility begets volatility.
While the long term down trend remains intact the outlook on the day is a move through the 50% retracement of the recent fall for a couple of hours opens the way to 1.2472, 1.2572 and 1.2740/50. Support is 1.2300/10
AUD/USD: Dunce’s hat for me on the Aussie over the past couple of days. Below is the weekly chart of the AUD which shows a reasonably big level overhead at 1.0680/90 which is the tentative downtrend line from the 1.1080 high in 2011.
Support is 1.0530/40 and on the week 1.0450 which held so well last week will be solid.
DATA: TD Inflation and ANZ Job ads here in Australia today and tonight Fed Chairman Bernanke speaks.
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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