Macro Morning: Boing!

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The dealer played the risk-on card in the past 24 hours but the bullish bounce in Asia passed Europe by even thoughoil, the US dollar, gold and the Australian dollar reacted strongly to the improved sentiment.

The rally started in Asia after the Presidential debate yesterday and some analysis was that with Romney winning the debate the chances of a Republican victory were increased. Seemed a little bit of a stretch to me but the sectors Romney mentioned in the debate rallied so who knows? Also, comments by ECB President Draghi overnight reiterating his commitment to rescue the euro and to buy bonds if required.

In truth the recent market moves are just noise but the key is that the positive trends in the euro, S&P 500, gold and our own SPI200 (my futures based proxy for Australian equities) have persisted for some time. So perhaps this consolidation was the pause that refreshes. By that I mean that there are two types of consolidations in markets in my experience: price, where the market goes in the opposite direction for a time but does not break the trend; and TIME, where markets go nowhere for a while washing off the overbought or oversold nature of their moves before then resuming their trend.

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Last night’s rally is just one night so it could equally be just noise but the trends persist. That’s the key.

Getting back to Draghi’s comments, has anyone noticed that the focus remains on the euro and not the economy? Of course the euro is the proxy for keeping the EU as it stands but I reckon that the ECB and the political class are still working at a different pace to the market timeframes we work with. Just something to remember as it almost guarantees disappointment and reversals every now and then.

Data in the US overnight showed factory orders ex-transportation (transport has been very volatile recently) rose 0.7% in August reinforcing the ISM Manufacturing move back above 50. Shipments dropped in August from July and inventories rose so this is something to keep an eye on. Fed minutes were out and showed the discussions and concerns about the unemployment situation is what drove the move to QE3.

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At the close of play the S&P 500 rose 0.72% to 1461, the Dow was up 0.60% and the NASDAQ climbed 0.45%. In Europe there seems to be enduring concerns about what Spain is doing, even though the Spanish bond auction went off extremely well. At the end of the day markets were less sanguine then their US counterparts with the FTSE closing up just 0.03%, the DAX fell 0.23% and the CAC down 0.19%. The escalating tensions between Turkey and Syria might be concerning Europe as well.

It was this escalation in tensions that got credit for the big reversal of the previous days selloff in Nymex crude which rose 3.74% overnight. As you can see in the chart, the rally was impressive but for the moment crude is constrained inside the two blue dotted lines which represent support and resistance.

Elsewhere on commodity markets gold rallied 0.69% to $1792 oz and is now at its highest level for 2012. In the Ags, corn hardly budged, wheat fell 0.43% while soybeans rose 1.27%

The Australian dollar had a really good rally in the past 24 hours as the US dollar weakened and equities rallied. This combination plus a retest of important support in the 1.0150/60 region (low was 1.0180) drove the Aussie up to a high of 1.0271. The risk rally has helped the Aussie, no doubt about that, and it remains the case that it is stocks and specifically the S&P 500 which is the key to the Aussie’s medium term strength or otherwise.

In other FX pairs, usual production resumed with the USD dollar falling in line with the uptick in equities and the euro’s strength after Draghi’s comments. The dollar index broke down below a little 15 day uptrend it had been in recently and its downtrend remains intact. As a result, the euro rose back above 1.30 and the pound briefly touched 1.62 overnight. If stocks continue to rally expect these trends to continue – non farm payrolls tonight is hugely important.

Lets have a look at some Meta4 charts from my AVATrade platform.

EUR/USD: EUR’s rally continued overnight and the uptrend based on JimmyR and the ADX remains intact. As you can see, there is old trendline resistance around 1.3115. Support on the day is strong in the 1.2945/50 region and medium around 1.2967 which was the level we identified yesterday euro needed to get through to kick on.

AUD/USD: A messy chart as you can see with the various Fibo levels. Key here is that the AUD has not closed below the 38.2% retracement of the May-August rally and it remains well bid every time it sneaks below 1.02. As we noted yesterday we thought the bounce had some legs with resistance at 1.0264. High over 1.0271 suggests this remains the case:

Data: Non-farm payrolls tonight in the US is the key release for the globe.

Here is a snapshot of where markets sat at 6.00am this morning from MT4 at 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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