Stocks had a better day in Europe today for an irrational reason but a better day nonetheless. The newswires are reporting that the main reason was a big drop in US jobless claims but also because the S&P downgrade of Spain to BBB- actually pushes Spain closer to asking for a bailout and as such the ECB can unleash its bazooka.
The FTSE rose 0.92%, the DAX rose 1.06% and the CAC was up 1.42% while Madrid rose 0.91%. Strangely the Spanish bond rates fell as a result of expectations of ECB boss Mario Draghi riding in on its charger.
A pretty good night after a few poor days but gee whiz we live in an upside down world when a downgrade is good news and I reckon that the article in the Financial Times by Mohamed El-Erian yesterday/overnight titled “Beware the central bank put bubble” is right on the money. The central banks are certainly doing a great job of holding up asset prices but as El-Erian says:
Essentially, the Fed is inserting a sizeable policy wedge between market values and underlying fundamentals. And investors in virtually every market segment – including bonds, commodities, equities, foreign exchange and volatility – have benefited handsomely. In the process, many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there.
Amen to that. Whether it is the Fed goosing stocks or a Spanish downgrade increasing the chances that Spain will need a bailout it clearly doesn’t want because it is not comfortable to lose control of running its economy, the markets are acting as if central banks are the right hand of God. And so bad news is good news – at least for today!
I also mentioned the big drop in Jobless Claims which fell 30,000 in the past week. This is a spectacular drop but the Wall Street Journal reports this morning that this is largely due to a change in the seasonal adjustment patterns for one state. It was largely lost on the US markets which are close to flat this morning. Elsewhere the trade data won’t have pleased the Fed as it showed a widening of 4.1% to $44.2 billion as exports declined faster than imports.
At the close of play the S&P 500 was up slightly to 1432, the Dow down 0.14% or 18 points but it had been up as much as 83 points earlier in the day and the NASDAQ also down 0.08%. Europe will be playing catch up late this afternoon unless something positive comes out in Asia today. The US Treasury auctioned 30 year notes which went a bit poorly relative to the 10 year auction the previous day with a lower bid to cover ratio than recently and an increase in yield to 2.904%.
On commodity markets, apparently concerns over Mid East tensions and the Turkish forced landing of a Syrian cargo plane got people talking and crude rallying. Nymex crude was up 1.24% to $92.40 Bbl. Gold was up slightly and the drop I was expecting hasn’t occurred yet – might be feather duster time. In the Ags, corn was up 4.72%, wheat 1.83% and soybeans 1.62%.
On FX markets, the Japanese are getting antsy again about the Yen’s ridiculous strength. Ridiculous insofar as with the Japanese economy mired in economic stagnation the Yen should be weaker than close to multi-decade highs against the US dollar. Yesterday Seiji Maehara who is the Japanese Economy Minister said that Japan may intervene in the USDJPY market even without the consent of the US:
“The currency issue reflects national interests…It’s not something to negotiate about.”
Mmmm, not the US trade deficit move overnight and you’ll get a sense of the stakes in this currency war – what fun. This will be a great selling opportunity if they do it because unilateral dollar Yen intervention usually works short term but then fades fairly quickly.
The Australian dollar did better after yesterday’s employment data. The increase in full time employment was good and the net gain after part time falls were deducted wasn’t too bad either and FX dealers focused on this and took the Aussie sharply higher. The break of the 1.0260/70 zone opened the way toward a retest of the down trend line that comes in around 1.0320ish but it ran into solid resistance at the 200 day moving average at 1.0296. Elsewhere the EUR was up sharply rising from a low yesterday around 1.2824 to a high overnight at 1.2950 – truly remarkable – and it now sits at 1.2926. Clearly this is all about Spain and the ECB bazooka but gee whiz it makes no sense if you look at it rationally. But hey who said that markets were rational 🙂
Lets have a look at some Met4 charts from my AVATrade platform.
EUR/USD: This 1.28 region we identified as support was super strong again overnight and the EUR rallied strongly off a low of 1.2824. It is starting to look like EUR is mapping out a 1.28-1.31 range and using the shorter term technicals to trade this range is favoured until either side breaks. 1.2989 looks very solid if the high overnight of 1.2950 is breached – this level will be first resistance today. A break of 1.2915 opens the way for a drop to 1.2890. Favour downside on the day initially.
AUD/USD: I tweeted on my new @Macro_Forex trading stream after the employment data yesterday that I thought AUD could head toward a retest of the down trend line. But the 200 day moving average pulled the AUD up offering solid resistance overnight at 1.0297 (high of 1.02925). I can’t see it getting back up to or through this level now on the day and a break of 1.0250 would open the way lower.
Data: Nothing in Australia today.
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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