Macro Morning

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.

  1. A Stock market sell off or crash or
  2. 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.

Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility and you should consult your investment or financial adviser before making any investment decisions.

Latest posts by Deus Forex Machina (see all)


  1. Sorry I dont know where to mention elsewhere (maybe you guys should allow the piunters to load up bits of research on a sort of punters page)

    But there is a very large economic outlook released out of London in the last few days by ING (Rob Carnell). It has load of great charts and data.

    One of its interesting observations is that (at least in the US) it is manufacturing jobs leading employment growth out (or along the bottom of) this recession.

    Mod: best place is commenting on the daily links page, its become the “de facto” sharing page of information through links/etc.

  2. DFM, just so you know Mr Stubb is the numero uno europhile in the country. His statements certainly are not representative of feelings of average Finns on the streets.
    Stubb represents centre right as does PM Katainen and in the latest polls they lead with 20.8%, next up social democrats (Finmin Urpilainen’s flock) with 20.3%, then True Finns with 17.5%, fourth place went to the centre party who has become more euro critical this year, lead by a successful businessman new to the political scene, and then the smaller parties Greens 8.5%, Left alliance 8%, Swedish speaking Finns 4.4%, Christian democrats 3.7%.
    People had been askd how they would vote if the parliamentary elections were to be conducted now.

    Currently Finland is preparing for council level elections and most Finns are not treating the election as an opinion poll regarding the euro. Only 18% view it that way.

    I spent some time in Finland a while ago and noticed worry and uncertainty among friends and in the media. However, most people incl the MPs do not understand the whole picture and MPs have been complaining that they have been given limited data to work on, and that they struggle with understanding the complex financial statements given to them like those a day prior to voting on the Spanish bank bailout for example. Even the interpreters had struggled with the paperwork.

    Once it comes down to losing independency a lot of Finns will get extremely angry. Because of the history in the shadows of first Sweden and then Russia, independece for many Finns is almost sacred.
    Secondly, honesty has been the backbone and pride of the Finnish upbringing, and I am not the only one with deep loathing of corruption. It exists in Finland too, but is not systemic across the society as it is in southern Europe. Pardon me for saying so but it is pretty much common knowledge.

    Sorry for the long post.
    Sometimes I feel ashamed of being an open eurosceptic but I can’t become a europhile until democracy is protected and those at the corporate, political and criminal scenes who played s role in creating this mess face court. Corporate greed and corruption truly are at the heart of this problem and tax payers should not pay for it all.
    Rant over.

    This says it in a more elegant way:

    Ultimately, the Eurozone will have to choose between sovereign default through debt restructuring and default on the real value of government bonds through inflation. Debt restructuring has many advantages if it is undertaken at an early stage.

    Through orderly default, investors take responsibility for their investment decisions. This is not the case if they are bailed out via debt socialisation. Debt restructuring in the Eurozone would typically come with onerous conditions for borrowers, whereas excess inflation provides an easy windfall to all debtors. Thus, moral hazard for creditors and for debtors is attenuated.
    Debt restructuring puts a much larger fraction of the financial burden on financial investors outside the Eurozone, whereas debt mutualisation bails out financial investors worldwide at the cost of Eurozone taxpayers.
    Given the extremely high concentration of financial wealth, losses in any sovereign default will fall mostly on wealthy investors (as bank shareholders or bond investors typically are). By contrast, when debt is mutualised, middle-class taxpayers, the main source of tax revenues in the Eurozone countries, will have to bear a much larger fraction of the burden (Hau 2011).
    Bailout schemes, as in the case of Greece, Portugal, Ireland, and soon Spain, come with politically sensitive external monitoring over an extended period of time. Orderly sovereign default in the Eurozone is likely to be linked to external conditions as well, but by reducing the transfers from over-indebted countries to their creditors, it removes one of the most poisonous elements of this process.