Stocks traded lower in Asia yesterday morning giving the S&P 500 a chance to test the important trend line support highlighted yesterday and then in European and US trade we saw a bounce as support held. That’s good news for the bulls, not even the bulls really, just the overall shape of the market because I worry when volatility gets very low that any small catalyst can cause an out-sized reaction from traders and investors.
And make no mistake, with stock market volatility back at levels last seen before the GFC, complacency will build. That is the lesson of history but can complacency really build in this fractured global economy? No because we all, traders, investors, strategists, pundits, central bankers and policy makers, know that the headwinds we face are massive. But yes as well because of the way the market and traders trade – low volatility normally leads to bigger bets in some quarters of the market as players trade bigger size in smaller ranges to make, or try to make, an equally large amount of cash.
My sense is it is too early yet in the low volatility environment for that kind of aggressive negative price action and the central bank actions to put free money into the market is certainly aimed at damping downside volatility. But I am on guard and I reckon investors should be too. However, don’t get bearish unless that trend line gives way and even then Presidential years normally end well.
US equity market closed higher on the day with the S&P up 0.81% to 1440, the Dow up 0.72% and the NASDAQ up 0.66%.
Key to the strength in the US overnight was the release of retail sales for September which rose for the 3rd month in a row. Up 1.1%, retail sales surprised the punditry, while the previous month was revised from 0.9% to 1.2%. The increase in September was in no small measure helped by the launch of the Apple iPhone 5 with electronic store sales up 4.5% for the month. All up, after taking out volatile items, core retail sales rose 0.9%. I must say with so many Americans still on food stamps or out of work and with the overall economic prospects for the economy still in the 2% region of economic growth, I find it hard to reconcile the bounce in retail sales but consumer confidence figures are supportive of the sales. Clearly some parts of the US economy are healing. Elsewhere though the Empire manufacturing in New York was disappointing at -6.61 but still an improvement on the -10.4 from last month.
The Chinese data which showed the CPI at just 1.9% kicked things off in Europe with hopes and expectations that China can stimulate further and then news from the EU saying that talks with Greece for the release of the next installment would be finalised in November pushed things along. Greek yields rallied as did Portuguese bond prices which fell to their lowest level in around 18 months. So at the close of play the FTSE was up 0.21%, DAX up 0.40% and the CAC was its usual more volatile self up 0.92%.
There is clearly room for a big catch-up in Asia today particularly the All Ords.
On FX markets, the US dollar was stronger against the Yen and the euro after some earlier weakness on the back of the data discussed above. The evolution of the US dollar’s relationship with stocks will be interesting to watch in coming weeks and months if the US economy continues to outperform its European and Japanese counterparts. We’ll see. After early weakness in Asia where the EUR fell below 1.29 it rallied strongly on the European open to a high of 1.2895 and sits now at 1.2954. USDJPY sits at 78.66 after a low yesterday of 78.37 and a high overnight of 78.83. The Australian dollar likewise has found support again after dipping down toward 1.02 with a low at 1.0205 before rallying with the Euro to 1.0267 and it sits just below at 1.0254 which is about where it opened in early trade yesterday.
On commodity markets, gold fell 1.21% and hit the 1737 target from a couple of weeks ago overnight and looks to have a little further downside momentum yet but I am not overall bearish characterising this as a pullback at the moment. Crude fell 0.19% to 91.69 Bbl, copper was flat, corn fell 2.1%, wheat dropped 1% and soybeans fell 2.01%.
Lets have a look at some Met4 charts from my AVATrade platform.
EUR/USD: My hourly indicators had been working fabulously for a while now but yesterday was one of those days when you give some back. As you can see in the circled part I went short but got stopped a few hours later for a 50 point loss – ouch. Anyway that is the way of it sometimes. Looking at today’s there doesn’t appear to be any trend worth being a part of.
AUD/USD: Interesting price action yesterday in the AUD with a gap open around 1.0250 before falling back with the EUR during Asia where it found solid support and is now back testing the previous hourly uptrend line. The AUD looks like it might be building upside momentum but the 1.0290 200 day moving average might be solid support again it it can get there.
Data: RBA Minutes to this month’s Board meeting will be released today and while we wouldn’t expect too many surprises the punditry will be raking over the tea leaves. Offshore there is plenty of CPI and PPI data but we’ll be looking out for the US Industrial production and TIC flows as the key themes tonight.
Here is a snapshot of where markets sat this morning at 7am 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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