Macro Morning: Risk awwwn

US Non-farm payrolls disappointed on Friday adding only 96,000 jobs against expectations above 120,000 but the markets were in far too ebullient mood to let this disappointment rattle. The fall in the unemployment rate might have helped and the rising expectation that this was the final shove for QE3 helped also. Either way it was a good week for stocks on both side of the Atlantic.

At the close of play the Dow was up a little rising 0.11%, the S&P 500 rose a more interesting 0.4% to 1437 and once again at the top of the 3 month uptrend channel. Unlike last time it got to this roofline resistance the MACD is not flagging a warning so we will see how it goes. Resistance is always resistance though when it comes to trend lines. The NASDAQ was fairly flat.

In Europe markets were similarly buoyed with the FTSE rising 0.33%, the DAX rose 0.66% and the CAC was up 0.26%. Bond rates and CDS prices continued to fall in both Italy and Spain adding to the happier mood.

And why wouldn’t there be a happier mood in Europe and markets globally given what a relief it was to have ECB President Mario Draghi break the mold last week and deliver on his promise. For all my rhetoric about the fact that this does not address the underlying economic problems the reality is that he is dragging the entire European politico-economic complex with him toward buying time to get this mess fixed.

However, the hallmark of the Eurozone crisis over the past few years is that there has always been a reason to be worried or bearish even amongst the hope. In the wake of Draghi delivering last week, markets might once again be tempered this week in the lead up to the decision from the German Constitutional Court on the legaility of the ESM which is one of the “old” Euro rescue package. I like the way Reuters characterised it this morning:

If the court were to rule against the ESM, it would have a devastating effect on bond and currency markets, pushing the 17-nation currency zone deeper into turmoil by casting doubt on future rescues of heavily-indebted southern member states.

But if as expected it gives a green light, it may set out caveats that scare investors and complicate crisis-management.

So once again good news could be bad news or it could be really good news and build on the positive response to the Draghi’s plan. I can’t claim to have any insight into what the court might do so I’ll just follow the price action and on that front the Euro looks pretty good at present.

In FX land, the Euro did very well Friday making a high above 1.28 where it sits this morning. On the back of the weaker than expected non-farm payrolls the USD pretty much collapsed and the single currency was trading up near its 4 month high. The rationale for the USD collapse is that the weaker than expected jobs report heightens the chances of QE3 which – from my point of view has had at its core the debasement of the USD. I’m still not convinced that the Fed will deliver QE at this week’s meeting – indeed Zerohedge has a great piece that suggests that the Fed may simply be constrained by the limitations of the available stock it wishes to buy. But I reckon they have to hint at it still and promise low rates for longer and longer which will have a similar impact.

For the Australian dollar the risk rally and the fact that it bounced off the 38.2% retracement level and then broke the down trend saw it roar higher over the weekend and it sits this morning at 1.0365. It is going to do well while there is hope in the market even if it has been losing ground on some of the crosses.

On commodity markets there is a lesson for anyone who wants to trade for a living. That is you have to have a plan, what I call protocols, and you have to take your signals. Remember Friday I said “gold is above $1700 so I have to be on board now with the rally given my protocols but it feels uncomfortable.” Gold rallied 2% Friday proving why you have to take your signals even when it feels uncomfortable – stops are dragged up now.

On the broader market the CRB rallied almost 1% as the USD fall shot prices higher in USD terms. Nymex Crude was up 0.92%, silver rose 3.1%, Dr Copper really likes this risk rally (and Chinese infrastructure plans – which I haven’t touched on here today but I linked on Saturday morning) while in the Ags it was more of a mixed bag.

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

EUR/USD: Another lesson in following protocols. Even though my indicators were flashing warning signs it was evident the Euro could “run to 1.27+” as I noted on Friday. Euro sits now at/around the 61.8% retracement of the April-July sell off which comes in at 1.2798 and the bias is toward 1.30 now as we noted also on Friday. 1.29 might offer stiff resistance on the way though:

AUD/USD: Okey doke – we got the bounce we were expecting and the AUD hit every target we had and it is back above the 200 day moving average which is pretty important. The set up looks like this pair wants to go higher still but I need a day to confirm. I’m expecting a pullback today toward 1.0340ish based on the 4 hour charts which look very toppy:

DATA: Home Loan data in Australia today and then Japanese GDP data is also important.

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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