Macro Morning: Give that Spaniard a cigar!

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The only way is up, baby – for you and me now!

Markets rallied overnight as data in the US was poor and Spain released its 2013 budget, which will usher in more austerity in a bid to fix its economy. Spanish PM Rajoy was so happy and comfortable that he was wandering round New York smoking a cigar – the unemployed in Spain must be so happy that he is on top of everything (HT – BI for the pic).

Both statistically and practically, predicting any one day’s price action is a turkey shoot. The headlines you see are simply a way to label what happened. So how can it be that markets were off the days before yet talk of Chinese liquidity stimulus (something that has been driving rates lower for a while now) a Spanish budget that simply underscores more riots to come and US Durable Goods that were much weaker than expected caused a rally?

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Who knows – the reality is simply that today there were more buyers than sellers and more sellers than buyers the previous few days.

The more interesting question is whether, like QE2, the post announcement pull back is over and markets are ready to rally again. Chris Becker and I were talking about this very topic yesterday and it will form the basis of my Wrap in this week’s Macro Investor edition. We think we have the nub of what’s going on.

Anyway, overnight the Spanish budget had all of the hallmarks of a step toward a formal request for bailout which seems to be what markets fixated on rather than the €40 billion in expenditure cuts, the reduction in growth this will engender and the increase in interest expense that Spain is going to have to pay in 2013. The political class remains disconnected however and Forbes reports that:

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“This is a crisis budget designed to get out of this crisis,” said Deputy Prime Minister Soraya Saez de Santamaria to the press, flanked by Finance Minister Luis de Guindos and Treasury Minister Cristobal Montoro.

Yep austerity your way to economic growth and health is such a successful strategy.

But even though Jens Weidmann upped the rhetoric on legacy banking again the markets liked it and taking the lead from a better Asian session where traders focussed on the Chinese liquidity injections, the bourses of Europe were higher overnight. The FTSE was up 0.2%, the DAX up 0.19% and the French CAC continued its more volatile trade rising 0.72%. In Spain 10 year rates fell about 8 points back below 6% to 5.94% but the Madrid stock exchange was down 0.1%.

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In the US, Durable Goods were appalling, falling 13.2% month on month against expectations of a very solid 5% fall. Ex-transport it was not quite so weak but still -1.6% versus +0.2% expected. Elsewhere the revised GDP data for Q2 saw the growth rate cut from the previously announced 1.7% to 1.3%. The US annualises its data so this is not much of a difference but in Australian terms the print would have been a pretty low 0.3% for the quarter.

At the close of play the S&P 500 was up 0.96% to 1447, the Dow up 0.54% and the NASDAQ 1.39%. Which makes no sense fundamentally but then as I said earlier any one days trade and what drives it is a turkey shoot.

On commodity markets the better feeling in equities helped reverse some of the previous weakness in crude in particular which rallied 2.3% to $92.10 which helped the CRB Index to close more than 1% higher. Gold too was up rising 1.47% while silver pushed 2.2% higher. Dr Copper rallied 0.97%. Corn, wheat and soybeans all fell in varying degrees and the lovable rogue that is orange juice rallied 1.44%.

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In FX markets the Aussie dollar got a strong lift in Asian trade and pretty much hung onto this strength all night. From a low 1.0367 yesterday morning the Aussie rallied up to a high of 1.0455 and is just below that at 1.0438 as write. The euro likewise was stronger as the inverse correlation between US equity market performance and the US dollar continues from day to day. Which way the causality runs is hard to figure some days – structurally I think that a weaker US dollar is needed to see US equity markets push substantially and sustainably higher but day to day the relationship seems more driven by the daily risk on or off feel to the market.

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

EUR/USD: Support remains large for the EUR at 1.2812 which the 38.2% retracement of the recent upmove. Unless or until that breaks this is just a consolidation but it is a level to watch. JimmyR says this is still a positive trend for the EUR and only a breach of 1.28 would change that structurally and my system based on this would exit its long.

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AUD/USD: The AUD pulled up just above the 200 day moving average overnight and the 1.0310/20 level will be very important again today. JimmyR says the AUD is still trendless presently but as I said yesterday the AUD feels like it is going lower. Overhead resistance levels on the 4 hour charts of 1.0380/85 and 1.0437 which is the 4 hourly downtrend line.

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Couple of issues with the Calender this morning it will be back next week.

And here is how the markets sat this morning at 6.30am courtesy of AVATrade

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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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