Macro Morning: Euro volatility

Euro was absolutely smashed in early trade last night as it and the Dax were sold heavily on talk that the commercial and retail arms of Deutsche Bank are to be split up. But it was then rescued in part by the ZEW survey and the strong Spanish bond auction. Equally however, in the case of the euro at least it might have also been pressure from EURJPY selling as the BoJ failed to deliver anything fresh or new for the market after all the hope and hype in the run up to the announcement over the past month or so.

And so it is that the old market axiom of “buy the rumour – sell the fact” is once again reinforced. The reason that this this axiom often works is rooted in human and market psychology. When the rumour hits markets react to news, or the hint of news, and price accordingly. Then the hint or rumour is either true or not but the key is for the trend that the rumour started to kick on or extend the actual  release of the information has to be even more bullish or bearish than what is priced into the market. It’s a discount mechanism.

The BoJ did not go beyond the Government’s hype. Indeed some market players reckon it didn’t even live up to the hype even though it is going to conduct “open ended” bond buying operations and set a target of 2% for inflation. The Japanese Prime Minister Abe said yesterday:

“In terms of making a bold review of monetary policy, I believe [the agreement with the bank] is a ground-breaking statement… A macroeconomic regime change clearly is under way.”

That is so but markets seem to have been looking for more. Or the Japanese authorities have no credibility left.

Elsewhere in the past 24 hours as noted above the euro and DAX tanked at one stage but the release of the ZEW survey for Germany, which showed a huge improvement in the economic sentiment index in January to 31.5 from 6.9 last and 12 expected, while at the same time the current situation rose to 7.1 from 5.7 last and better than the 6 expected. The broader Eurozone economic sentiment survey was also sharply higher at 31.2 from 7.6 last and against 14.1 expected.

Also positive, and a big indication of how the fears about Europe are receding from market players minds, was the Spanish bond auction. Spain issued €7 billion in 10 year notes at 5.4% but the big news was the bids it received for the notes which totaled €24 billion. Spain’s Economy Minister Luis de Guindos said overnight:

“Never in the history of Spain’s Treasury has there been such a volume of demand, whether in an auction or a syndicated sale,”

Data in the US was a little disappointing with Existing Home Sales falling 1% against expectations of a rise of 1.2% in December and the Richmond Fed manufacturing index was also weaker than forecast at -12 from 4 expected.

The DAX recovered from its lows at 7634 to finish at 7696 but still down 0.68% at the close. The CAC fell 0.59%, the FTSE was essentially flat dropping just 0.03%. Italy was up 0.48% while Spain fell 0.39%

Alfter a poor start to the day the US markets has spent the rest of the day clawing back its loses and then moving into the green. With 35 minutes to go the Dow is up 0.30%, the S&P up 0.27% and the NASDAQ is flat.

Earnings season is upon us and some individual moves are helping drive stocks. Boeing was sold down more than 1% after it announced over the weekend it was to stop delivering the Dreamliner, Johnson and Johnson lost 0.7% after the full year forecast was down graded while Du Pont rose almost 2% with better than expected 4th quarter profits.

In Australia, today’s CPI release will inform the question of whether or not the RBA is going to cut at the meeting the week after next but it seems increasingly unlikely given the healing in the global economy. A wait and see approach with rates at 3% would seem more like the RBA’s usual modus operandi.

A wild ride for euro overnight for no gain other then frayed nerves for traders. Euro traded to a low of 1.3266 and a high of 1.3371 before sitting roughly unchanged at 1.3314. Sterling also had a bit of a wild ride although not so bad as euro trading in a 1.5808-1.5883 range before resting at 1.5835 up 0.04% on the day. USDJPY did actual move as noted above with a rise of 0.93% against the USD to 88.75 but well off the days low and important technical level of 88.35. The battler is also up a little at 1.0558 rising 0.40% on the day.

Gold rose 0.37% as it continues its quiet rally and it sits now at $1693 oz. and closing in on the top of the downtrend channel it has been in since late last year. This little rally looks like it still has some legs technically so we might see if this level of $1708/10 oz. offers decent resistance or not. Silver was up 1.09% as it too closes in on downtrend resistance.

gold, gold price quote, xau, xauusd, gold daily chart

Crude rose to $96.13 bbl of 0.71% while the Ags were mixed with wheat falling 1.40% but soybeans gained a similar amount.

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

EUR/USD: 

Even for all the volatility last night, the euro remains captured inside its Darvas box and as we have been saying the past few trading days – either trade inside the box or trade the break:

eur, eurusd, euro, euro (eur) price quote

AUD/USD:

The Aussie is also trading in a box which you could probably define as 1.0480/1.06 and unless or until we get a catalyst for a break then short term trading inside the parameters of with a break is the way to go it seems:

aud, audusd, australian dollar, australian dollar price quote, audusd

Data

Westpac Leading Index today and then Australian CPI with the market looking for 0.4% qoq and 2.4% yoy. Chinese leading economic index is out later today and tonight in Germany we have a bond auction and a raft of secondary European, particularly UK, data. Given last night’s housing data Mortgage Apps in the US will be important tonight as well.

Twitter: Greg McKenna

Here is how the markets looked at 7.53 this morning.

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Comments

  1. What is anyone’s long term view on the EU, to me it looks like a no win position, with the PIIGS still in a lot of trouble and getting worse.

    Industrial output is getting worse, and unemployment continues to grow, including in the core now.

    I scan the web everyday in search of news on Greece’s social stability and by all accounts it seems to be getting a lot worse, with talk of possible civil war in some groups while others say dictators could jump in as its rip for the pickings. Though Greece is small, I don’t discount the billions in debt it owes and may decide not to pay back if a radical group got into power, which in my view would send a shock wave through the EU markets.

    Japan does not seem to give confidence to anyone still, so two once powerful economies, the Japanese and EU seems to have run out of steam.

    Just wanted to see what others thought about it ?

  2. Bearish.

    Peripheral Europe either endures depression until there are no government assets to privatise and all social spending is harmonised with the core or it breaks away and causes chaos for 12 months.

    Germany will not support better conditions in the periphery than its citizens obtain at home.

    And the months before a breakup could be full of violent protests to bring austerity supporting governments to the ballot box.

    I am amazed there has not been a breakdown yet. I must be a perma-bear!

    I must have focussed too much on the economies and not enough on how governments would react and how government /Central Bank action would lower interst rates and cause yield chase into equities.

    Must have read too much John Hussman!

    • yea, i am suprised that a breakup has not happened sooner. Greece it seems is trying to sell national assets with the Russians and Chinese very interested, though how this will go down with the general population (and no bets on how it will go down with Golden Dawn) will be interesting, my gut feeling is people are going to get even more angry to see national assets sold off to overseas interests.

      But just like any other country, what happens when the money from those assets is gone, it’s back to square one but in an even worse off position.