Macro Morning: Bernanke drops, so do stocks

The Fed has ramped up its efforts at stimulus and signalled that the notion of QEInfinity was right expressing its disappointment at the recovery so far and the level and length of time that Americans are spending on the dole queue. In its statement this morning the Fed said that it will keep rates at zero until the unemployment rate hits 6.5%. It has also replaced operation twist with a new bond buying program which not only includes its commitment to purchasing agency mortgage backed securities in the amount of $40 billion per month but also to purchase longer term Treasury securities  “initially” at a pace of $45 billion per month from the end of the year.

Please note the $45 billion of buying will not be sterilised in the same manner that operation twist was by selling short bonds – that is quite a big further monetary stimulus. Accompanying the statement was the Fed’s forecasts which suggest that unemployment won’t be at 6.5% until 2015 so we have at least two years of zero rates ahead of us in the US.

The result has been an initial lift in risk appetite with stocks higher and the US dollar and Japanese Yen under pressure. While assets that have been goosed by a weaker USD and quantitative easing over the past few years like the Aussie and Kiwi dollars, like crude, gold and silver all rose in response to the Fed’s moves. But the worm has turned as we near the New York close.

Equally important overnight was the unexpected hand across the aisle from Silvio Berlusconi to Mario Monti in Italy. Mr Monti, who resigned over the weekend had been making some strange noises about potentially running in the election. Overnight however Berlusconi in a grand gesture saying that he had no personal ambition offered to withdraw from the race and to support Monti as long as he came together at the head of a party of moderates.

The combination had been a very positive night across the board although it is worth saying as I write that the gains are being trimmed possibly by the reality of the economic weakness that the continuing Fed action speaks to and also the fact that markets tend to melt up in a more resilient but persistent manner than they fall.

The raft of economic data and negative comments from John Boehner on the fiscal cliff out in the past 24 hours has really been lost in the milieu including the fall in in European Industrial Production of 1.4% in October and the deterioration in the UK labour market. On the brighter side the highlights were better than expected Japanese Machinery orders for a year on year basis up 1.2% versus -4.4% expected even thought the monthly data was down a little at +2.6% v +3% expected but a nice bounce anyway after last month’s weakness. India also had a big bounce in industrial output and manufacturing output by 8.2% and 9.6% respectively from last month’s negative prints.

Europe was closed by the time that the FOMC statement was released  but they had had a vaguely positive day regardless with the FTSE up 0.35%, the DAX up 0.33% while the CAC was essentially flat rising just 0.01%. Madrid rose by 0.82% while the Italian market rose a stellar 1.15%

In the US with 15 minutes before the close the S&P has fallen back to be down 0.02% at 1427, the Dow is down 0.10% and the NASDAQ is actually more deeply in the red, down 0.38%.

As the US dollar weakened so then many of the US dollar commodities naturally increased their price in US dollars. Crude shook off an increase in EIA inventories of 843,000 Bbl versus expectations of a 2.6 million draw to rise 1.26% to $86.87 Bbl. This has not changed my overall outlook for a move to test trendline support as noted yesterday.

Gold was up 0.34% to $1714 oz. Silver surged 1.96% higher while copper was up 0.78%.

Lets have a look at some Meta 4 charts from my  AVATrade platform.

EUR/USD: When you look at the EURUSD chart below you have to ask if this isn’t just noise within the range of the last few months. As I wrote before the last euro reversal only a break of 1.3170/75 (plus your margin for error) will signal a change in trend for the euro and signal a sharper push higher. Last night’s high was lower that the recently aborted top so I remain of this view.

Euro dollar rally

AUD/USD: Looking at the charts and thinking about the drivers of the Aussie dollar at the moment, the call we made yesterday of a run toward 1.06 was coming is still valid but as you can see in the chart below like the euro the Aussie is pulling back as stocks digest the  economic reality over the monetary goosing they are getting:

Australian Dollar rally

Here is how the markets looked at 7.47 this morning.

Twitter: Greg McKenna or @FX_Global

Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility and you should consult your investment or financial adviser before making any investments.

Latest posts by Deus Forex Machina (see all)

Comments

  1. Another clear signal to investors to get into precious metals, IMO. This debasement will reach a tipping point at some stage, where people lose confidence in the USD.

  2. Concur with Revert2Mean.

    When will Bernanke & Obama realise that the medicine they are administering is not working. How many doses will be administered before the patient dies a painful death?

    There needs to be some radical change for the market place; make it FREE market. Henry Georges’ policy would not be out of place. Trouble is that so few capitalists actually believe in a free market as he did.

    • Henry George – Ah, yes, Land Tax – a very good move. But equally, didn’t he believe that gold was no one’s possession either? Specifically, “everything found in nature, most importantly the value of land, belongs equally to all humanity” and that a Gold Standard was the way to go? So, yes, indeed. Shall we say US$500 per ounce, for starters?!

    • Yep, the fiat currency producers are at it again as expected, diluting our savings. Fortunately we have the choice of owning hard assets. In a democracy it is just too hard to raise taxes; it is much easier to take it by stealth through inflation. But in this case we have avoided deflation.
      So reluctantly I have come around to support the cause because austerity has a recent history of failure.
      This is an interesting article in the fin review…sort of a Greek style bail out for the US.
      http://www.afr.com/p/opinion/debt_the_radical_way_out_r34HM4XotpzBPKKS0JkJAN