There is no papering over the fact that I have no idea what drove the huge rally overnight. Initially the rally in stocks was blamed on a rumour (since debunked) that Romney was ahead in the crucial state of Ohio but the fact that the rally held and that oil kept rallying says that something else is going on.
All the economic news was pretty weak overnight with German factory orders down 4.7% in September for the 4th monthly decline and much worse than the expected fall of -1.5%. Markit’s Eurozone Composite PMI fell in October to 45.7 from 46.1 in September, which now brings the stretch of months below 50 to 9. In the UK the NIESR GDP estimate came in at 0.5% from 1% last. Redbook sales in the US were off 0.6% for October and the New York ISM fell to 45.9 in October from 52.9 last. Canadian data was equally poor with the Ivey PMI falling to 58.3 from 60.4 sa last time.
Let’s put it down to the resolution of political uncertainty. I saw on Bloomberg this morning that election day is usually a good day for stocks and markets are nothing if not superstitious so it could just be as simple as that but just like last week when we saw US stocks rally and fall 1% in consecutive days so this could be what is becoming usual volatility.
At the close of play European stocks decided to ignore the fairly obvious poor data and rally. The FTSE was up 0.79%, the DAX rose 0.70% and the CAC was 0.87% higher. Interestingly Madrid was 0.15% lower perhaps suggesting that this is just a short term move in the bigger markets.
In the US at the close the S&P 500 is up 0.78% to 1428, the Dow is 1.01% higher and the NASDAQ rose just 0.41%.
Asian markets like the Nikkei, which fell 0.36% yesterday, the Hang Seng which was down 0.47%, and the Straits Time which was down 0.41% have some catch up to do in trade today. The Australian index was up yesterday by 0.23% but would be expected to rally further in Asia although the election reality of how the vote goes could complicate things.
Here at home there is no denying the fact that I got the RBA wrong yesterday and clearly in the reaction and rally off the low of 1.0356 on the AUD says the market had priced for a cut as well. I read the statement and I heard caution in the words but then that is my bias so it is worth noting what Richard Grace – head currency strategist at the CBA said in a note yesterday afternoon. Richard wrote:
While describing a “higher than expected” outcome on inflation, the RBA noted the “effects on prices of the earlier exchange rate appreciation are now waning”. That is, the RBA tied their commentary on the AUD specifically to an inflation?fighting context. However, at last month’s RBA board meeting, when the RBA cut interest rates by 0.25%, the RBA tied their AUD commentary more towards a growth?supporting context, when they noted “credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook.”
This underlies the complexity of the high AUD from a policy maker’s perspective. But one thing is for sure, the RBA is not contemplating intervening in the foreign exchange market to lower or cap the level of the AUD because the floating exchange rate remains an important instrument in fighting “higher than expected” inflation in Australia’s economy.
All this is true and although the domestic economy remains under pressure the RBA is clearly of the view that monetary policy still works in the way it always has and inflationary pressure in Australia are still present. So the economy needs to weaken further or China needs to slow more for the RBA to cut. I think they need to support the domestic sector with mining now under pressure, at least the coal and iron ore guys.
There are some changes coming to the composition to the S&P GSCI commodity index which down weights Nymex crude in favour of Brent and this might have dampened the move in crude but it is up 3.16% to $88.36 Bbl. Gold was also higher rising 1.18% to $1712 oz and silver was 2.66% higher.
In the Ags, wheat lead higher with a 1.27% move while soybeans were 0.83% higher and corn rose 0.71%.
Lets have a look at some Met4 charts from my AVATrade platform.
EUR/USD: Euro rallied 0.21% to 1.2821 after pushing to a low of 1.2761 and triggering a bunch of shorts I’m thinking. A rally of this magnitude off the lows is not enough to flip the shorts yet (assuming they position size properly) but with an ATR of just 85 points on the dailies it won”t take a huge rally to turn the shorts. As you can see the 38.2% retracement level is solid support for the moment but EUR is below the 200 day moving average now:
AUD/USD: The Australian dollar is the clear winner over the past 24 hours with a rise of 0.77% to sit at 1.044 as I write and dead on the 61.8% retracement level of the September to October selloff as you can see in the chart below. Price action wise for the AUD if this 1.0440/50 region can be broken the AUD has some very big but important resistance at 1.0555/65:
Data: Today we get the RBNZ’s Financial Stability review which is always a good read, the AiG performance of construction index in Australia, Swiss foreign currency reserve data, Eurozone retail sales and German industrial Production. In the US we get consumer credit as well as the EIA crude stock report for the oil traders.
Here is how the markets looked this morning at 730 am EDT.
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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