Macro Morning: Markets roar

Draghi delivered on his plan to address the debt crisis overnight which in and of itself is newsworthy given all the false steps and miss starts we have seen over the past year. Stocks, the Euro and the  Australian dollar rallied strongly on the news.

The plan, now known as “Outright Market Transactions – OMT”, is essentially as leaked yesterday whereby the ECB will buy unlimited short end bonds (1-3 years) of countries who who formally ask for help and sign up for oversight. It’s purchases will be sterilised so for every dollar they put in via these bond purchases they will be withdrawing from somewhere else along the curve. Oh, and the ECB ranks with everyone else so they don’t have seniority for the bonds they buy

Draghi was clear that the Euro project is irreversable and that the ECB remained committed to taking out what he might call unreasonable volatility from the bond markets of nations under pressure. Crucially, as I noted before the countries have to make the step to ask for help and cede some sovereignty.

The Bundesbank is opposed as you would expect and the German press was apparently up in arms but Draghi got his way which is a powerful signal for markets that perhaps, finally, Europe will get serious about saving itself.

This was the message heard load and clear by stock and bond markets. In Spain the 2 year note fell back below 3% for the first time since this years carnage kicked of in April. Likewise the Italian 2 year rate fell to its lowest level since March this year. On the bourses of Europe it was green, green, green with the FTSE up 2.11%, the DAX up 2.91%, the CAC up 3.06% while Madrid was up 4.70% while Milan was up 4.30%.

For all the concerns I still have about Draghi’s plan not addressing the growth problems of Europe (he said the risks to growth are on the downside overnight) he has at least both delivered on a promise, which is a first, and succeeded in stabilising the European situation from the destabilising volatility that had been occurring. Hats off to him.

In the US the data was OK with the Services Sector ISM rising to 53.7 and beating expectations of a fall from the previous month. Likewise the employment data was good in the US with the jobless claims a little lower than forecast and the ADP employment survey stronger printing 201,000 jobs against expectations of 140,000.  Even the employment sub component of the Services ISM was strong jumping from 49.3 previously to 53.8 .

This strong data coupled with the ebullience from Europe, washed across the Atlantic and saw some very large moves. The Dow was up 244 points or 1.87%, the S&P 500 rose 2.04% to 1,432 and the NASDAQ was up 66 points of 2.17%.

On commodity markets the CRB didn’t budge much rising 0.6 points to 308.89 with mixed moves in its componentry. Crude fell 0.50% and as you can see in this chart it is losing momentum for the moment in its rally.

Gold is above $1700 so I have to be on board now with the rally given my protocols but it feels uncomfortable. I get a sense there is going to be a pullback but while the $1637-1642 Oz holds then gold is still biased higher.

In the ags, corn was up 0.97%, wheat 2.69% and soy was flat. OJ jumped another 1.19%.

In FX land the Euro had a surprisingly volatile night trading up to 1.2650 before getting slammed back down to 1.2560 before rallying back again toward 1.2650. It sits at 1.2630 as I write. The Australian dollar on the other hand just did well for most of the night on the back of what is clearly a risk rally and a better feeling amongst investors overnight. Reaching a high of 1.0298 is very impressive after the Aussie found support at 1.0170/80 again yesterday. The USD continues to be under pressure as the broad based Euro squeeze continues so it is going to be a very important close for the week after non-farm payrolls tonight.

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

EUR/USD: Euro has lifted it’s head above the trendline from last years highs as you can see below. This biases it back toward the range top at 1.2735/40 and if it gets through there then its onward to 1.30. My indicators are flashing warning signs and not confirming the break but that doesn’t mean it can’t run to 1.27+:

AUD/USD: For the last two days I have said “We’ve been targetting lower for some time and I noted yesterday that we may be looking for a slowing in the fall or a bounce” and we got that in the past day or so and beautifully too. The candlestick for the bounce of 1.0165/75 support we identified was sensational as was the overnight move to 1.0298. The 38.2% resistance level from the sell off sits at 1.0309 today so this will be hard to break and above here the 200 day moving average and 50% retracement levels at 1.0341 and 1.0353 respectively loom large:

DATA: First Friday of the month is always non-farm payrolls day and tonight’s number will be very important in adding or subtracting to last nights ebullient mood. In Australia today we get the AiG performance of construction index.

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 6.25 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)