Macro Morning: Stocks in heaven

The Dow and S&P 500 climbed to 5 year highs on Friday night while the NASDAQ is up in a stratosphere not seen in more than a decade as the Fed’s plan for an open ended QE3 program gets traction in asset markets. Key here for stocks is that the the Fed is telling stock owners its going to goose shares with free money until the economy catches up and hopefully – I’m guessing that’s the Fed’s hopes anyway – the renewed economic vigor will justify the prices on the Dow, S&P 500 and NASDAQ.

That has to be the case doesn’t it? How else could US markets have ignored the rising tensions in the Middle East as Israel seems poised to strike Iran and oil shot to $100 Bbl on this and QE3. How else could US stocks have ignored the inglorious industrial production number that was released in the US showing a fall of 1.2% and core retail sales data which showed growth of just 0.1% in August against expected gain of 0.4%. The headline did hit the expected 0.9% however.

The reality is that the news is somewhat irrelevant at the moment (the trend follower in me says this is more often than not the case)  as the market focusses on the upside and on the positive price action. Equally, if you do like news then consumer sentiment in the US jumped to 79.2 from 74.3 in August which is a level we haven’t seen in years.

Sounds confusing but the reality is that QE3 has put the onus on the bears to win the argument. Remember almost exactly 1 year ago markets were swooning on concerns about Europe and made a low in early October before rallying. It’s been a tumultuous 12 months but in the end a good 12 months since that low last year for US Stocks.

At the close of play the S&P 500 was up 0.4% to 1,465, the Dow rose 0.4% as well to 13,593 and the NASDAQ was up 0.8% to 3,183.  Short term though we might have made a high based on the charts but as you can see on the S&P chart any pullback is probably going to be supported around 1420 which looks solid as does the JimmyR trend indicator which says we are still in a bull trend.

In Europe the inevitable catch up after Thursday’s trade lagged that of the US. The FTSE closed up 1.64%, the DAX up 1.39% and the CAC rose 2.27%. Madrid rose 2.59% and Spanish 2 year bonds were down 19 basis points to 3.13%. What a big move in the past 2 months from up near 7% – Draghi should be proud because he has achieved his aim regardless of the enduring economic weakness.

On commodity markets, crude was up again and is likely to go higher still even though it retreated from the high of the night, Friday settling up 0.69% at $99.00 Bbl. Copper roared rising 2.78% no doubt also goosed by QE3 and the weaker US dollar and the CRB was up over 1% in aggregate. Gold sits at 1,772 oz and while it’s starting to look a little overdone the upside still beckons. Wheat rose 2.41%, Corn rose 1.05% while Soybeans fell 0.47%.

On FX markets the Australian dollar lagged the Euro’s strong rally failing at strong overhead resistance at the first try in some time. The lag of the Aussie against some of the crosses is where the concerns about the mining boom (that never was) and the outlook for growth are most in evidence. This is important for traders to note as I like to play the crosses at times like these to better reflect the economic reality rather than just the US dollar’s weakness. it also suggests Australia’s loss of competitiveness from the rising AUD/USD is not as great on a TWI basis.

The euro and other major crosses were all lifted higher by the weaker US dollar and while both the euro and the USD Index look like they have almost completed the full round turn on the charts, which means a reversal could happen this week some time, the overall bias seems to be for the weaker USD to persist thanks to the QE3 induced debasement. Bernanke would be proud – this is the unstated aim of QE.

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

EUR/USD: Friday I said “my jimmyR indicator says its still a bull market on both the 1 day and 4 hour charts so pullbacks are likely to be supported. A move through 1.30 opens the way to a full retracement to 1.3293.” Nothing has changed although it is loooking toppy for the moment.

AUD/USD: 1.0611 is the key – unless or until the AUD gets through there its just a big old range. A break opens 1.10+ but it has to break first. 1.0540/50 key short term level today and if breaks AUD will slip lower. 1.0450 should support.

DATA:New Motor vehicles in Australia today and then later in the week all eyes will be on US Housing data and European PMI’s.

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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  1. I wonder if this is the last roll of the dice for the Fed. How many quarters of increasing commodity and stock prices increasing will we go through before everyone realizes that this is having little to no actual effect on the underlying real economy. If we reach that point and everyone realizes that they have been goosed and that the Fed has run out of bullets it is going to get very very ugly. Short term/medium term, however, you’d be a fool to stand in the way of the markets.