The German constitutional court ratified the ESM rescue mechanism over night pushing one more obstacle out of the way to the continued renaissance of European action to deal with its crisis. The court did limit the amount that Germany can provide without a further vote in the Bundestag (€190 bln) but this was of little import to markets which took the news positively in European trade.
The Euro was the primary beneficiary driving to a high of 1.2935 before pulling back to 1.2892 as I write. Likewise the short end bonds of Spain and Italy benefitted with Spain’s 2 year bonds dropping another 11 points to 2.82% while Italian 2 year bonds dropped 12 points to 2.19%. German stocks gained 0.46%, the CAC was up 0.18% but the FTSE was down 0.17%. Unsurprisingly given it has the most to gain from the Constitutional Court’s decision the Madrid stock exchange was up 0.84%
All good news really but for mine one of the most telling things about what has happened and where we are in the evolution of this crisis were comments I picked up on Reuters from Finland’s Europe Minister:
“If you look at the ongoing few weeks, I would say we see a light at the end of the tunnel,” Finnish Europe Minister Alexander Stubb told Reuters.
He cited last week’s ECB decision as well as the proposed banking union, the German court ruling and expectations of a pro-European result in Wednesday’s Dutch general election.
“If we get the next few weeks right we’ll have turned a corner,” Stubb said in a television interview.
If the Finns are getting comfortable with what’s happening in Europe then we have truly turned a corner in the crisis. Sure it’s still kicking the can down the road and certainly, the comments from German Finance Minister Schaeuble that the ESM can not have a banking licence and that any amounts above the ESM amount sanctioned by the court needs a vote, means that its not exactly going to be smooth sailing. But the big Eurogeddon event risk seems to have been taken off the table. The economic future for Europe is another thing entirely as Ray Dalio pointed out overnight – check out The Prince’s piece on that speech here.
Across the Atlantic the US markets are quietly waiting for the decision from the Fed’s two day meeting tomorrow morning. There is a quiet expectation that the Fed will deliver tomorrow although I remain unconvinced and accept that I may look like a feather duster tomorrow.
At the close of trade the S&P 500 was up 0.21% to 1,436, the Dow up 0.07% and the NASDAQ up 0.32%. Apple released the iPhone 5 and Mark Zuckerburg gave his first public address since the float, which saw FaceBook shares up 7%+.
On Commodities it was a mixed bag with Crude down 0.36% to $96.82 Bbl, Gold unchanged at 1,735 oz. Copper was also unchanged while Corn fell 1.07%, Wheat gained 0.70% and Soybeans were up 2.53%.
In FX Land as discussed above the USD was under pressure once again which gave the Euro and Pound a lift. The Yen is at a 3 month high against the USD as well but it is the Aussie that has really turned around from last week’s weakness trading up to a high of 1.0502 overnight. It’s really just a story about the USD’s weakness and you can see this writ loud in the divergence between the increase in the USD currency pairs as opposed to the lack of action in the last couple of days in Crude and Gold which are also effectively USD pairs. Normally you would say that makes the Aussies rally tenuous as it is not confirmed by the usual drivers but that has been the case for some time now.
It is my strong opinion that only one of two things is going to knock the Aussie sustainably and materially.
- A Stock market sell off or crash or
- The Australian economy falls in a hole
Without these 2 things the Aussie is going to hold well above the mid 90’s which is where the “normal” drivers suggest it should be.
Lets have a look at some of the markets we follow using our AVATrade trading platform charts.
EUR/USD: The EUR rally continues but it couldn’t get through a very old trendline in terms of a daily close and it does look a little on the overdone side when I look at the MACD’s. I have a new indicator which I call the JimmyR and it says we are still in a bull market on both the 1 day and 4 hour charts. So any pullback is likely to be supported. On the day 1.2724 is first support then 1.2590/1.26. Everything hinges on the post Fed price action:
AUD/USD: The support we identified a few days ago in the 1.0320/40 region held well before this strong rally that topped out overnight at 1.0502. Interestingly my new JimmyR indicator still reckons the AUD is in a bear trend and the candlestick close from the last 24 hours could be an indicator of a pullback. The 4 hour trend is still up though so a fall below 1.04 would be needed to turn the short term outlook back lower:
DATA: It is all about the Fed tonight but in Australia today we get Consumer Inflation expectations and the latest RBA Bulletin.
And here is how the markets closed at 6.25 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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