Macro Morning: Fed caps stocks

See the latest Australian dollar analysis here:

Australian dollar runs riot on BoJo win

It was a big night for currencies and commodities but there is a real risk now for stock bulls that the FOMC just put a lid on the recent rally. The FOMC Minutes which came out at 1700 GMT or around 6am Sydney time and showed a recognition that the flow of easy money can lead to instability within markets, particularly at the stage where they need to withdraw or reverse the stimulus. Interestingly, rather than have a fixed end date at 6.5% unemployment, which could cause huge ructions as all of us outside the central bank conclave know, the FOMC members seem to have had a light bulb moment:

A number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

Sing Hallelujah! They get it finally but that doesn’t make it any easier to empty the bath without the baby going down the plug hole and the review that they have flagged of their asset buying program at the March meeting is now a critical point for stocks and other markets.

These minutes may have put a top in place for stocks. 

So stocks, which were already under pressure after a weaker night in Europe have really come under pressure from the FOMC minutes. With 25 minutes to go the Dow is down 0.62%, the Nasdaq has fallen 1.17% and the S&P is off 1.02% or 17 points at 1514. In Europe the FTSE managed to climb 0.25% no doubt excited by the prospect of more monetary easing while in Germany the DAX fell 0.3%, the CAC dropped 0.69% while Milan and Madrid were off 0.82% and 0.76% respectively.

Looking fundamentally for a moment, German CPI data was bang on expectations but PPI was a bit higher in January up 1.7% against expectations of a rise of 1.5%. In France the Business Climate survey was a little higher than expected while CPI was lower. In Italy the industrial sales and orders data was weak while in Britain the claimant count and unemployment rate were around expectations. In the US the housing related data was mixed with Building Permits very strong but housing starts and mortgage applications a little on the weak side while PPI gave no surprises.

In the UK the Minutes were equally interesting. Outgoing Governor Mervyn King led an attempt, along with David miles and Paul Fisher, to have the BoE increase the size of its bond buying program by £25 billion which was a surprise to the market. When taken in the context of the BoE recently increasing its inflation outlook the market is clearly fearful the risks are that the BoE throws caution to the wind in order to get the economy going which is putting further downside pressure on GBPUSD.

Turning to gold, the sell off continues although the big fall through the bottom of the downtrend channel and the push well through the Bollinger bands is faster than I’d expected. But then again we have always thought that Heisenberg’s Uncertainty Principle had a role in markets in so far as we can’t know both the target and when it will get there. It is one or the other so we focus on the target which remains $1525.

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

As you can see, gold is pretty much on its lows for the day and well below the significant moving averages. My trend following systems are short but it seems the market is at risk of turning even more bearish if my calculation that the 50 day moving average at $1671 and the 200 day moving average at $1668 is correct. Should the 50 day moving average  fall below the 200 day moving average then we’d have a signal for many traders that the bear market has begun. So watch the moves in the next couple of days.

Silver also has decisively broken down with a huge fall overnight of 2.71% to $28.67 oz. The low for the evening was right on the last Fibonacci support of 23.6% of the move from the June to October 2012 rally. Personally I never use this support level but others clearly must.

In FX land the Aussie is down over one big figure and is back below 1.03. Sterling has been absolutely thumped and is just above the crucial support zone. The NZD is also much lower after the RBNZ did its best impression of David versus the global currency market Goliath while the euro is also lower at 1.3273 and through the recent support line. The US dollar has jumped above 81 cents, it’s highest level in three months.

On commodity markets, crude was sharply lower dropping below $95 Bbl and our technical view is that it has some way further to fall.

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

S&P 500: 

The S&P has clearly hit resistance and although it hasn’t backed off  lack of follow through and the fact that it touched fast moving average suggests a reversal is coming. I am targeting a 30 point fall from here:

AUD/USD:

We can see the clear and volatile box that the Aussie is in at present. I sold with a stop at 1.0377 yesterday but took profit too early while asleep. Aussie will likely find some support today:

Data

RBA Foreign exchange transactions today in Australia and then it is Markit PMI time again with the release of dat for France, Germany, Eurozone, US and other jurisdictions. In the US jobless claims will be important as usual and crude stocks given the last days move could be crucial for Nymex prices.

Twitter: Greg McKenna

Here is how markets looked this Morning

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Comments

  1. The idea is that no one noticed you taking the baby out of the bath. My guess is that those that needed to, have……

  2. “Should the 50 day moving average fall below the 200 day moving average then we’d have a signal for many traders that the bear market has begun.”

    Don’t have any charting software handy at the moment, but if I recall correctly didn’t we see this occur near the 2012 lows for Gold as well as 2008? Seems like a bit of an overrated indicator if so… in fact it seems more likely to be another indicator of a bottom being close until it really is the case that the bull market is dead (then it might be an indicator the bear market has started, but this will be impossible to tell in the short term, so not sure what use it has as a trading tool).

    With Gold’s plunge last night it is looking more likely that we could test that $1520-1525 area that you wrote about the other day, but regardless even if Gold fell through that level (e.g. to high $1400’s) it doesn’t concern me. Gold broke through many technical levels in 2008 as well.

    • Deus Forex Machina

      Hi BB – thanks

      Don’t forget this overnight note is a mix of fundamentals but largely has a trading bias – at least that is the point of me doing this each morning. It’s the same process I’ve used almost every day for 25 years come April 18th.

      So your points are all well made and understood. If or when gold gets to my target I’ll re-evaluate – indeed it is getting overcooked now and could rally some but the trend still seems to be lower for the moment.

      Cheers

      Greg

      Oh and by the way – I don’t watch the 50 and 200 day crossovers I just know others are watching and talking about it so it is worth mentioning. Techincals to some have mystical powers but for me they work because people watch them.

  3. I don’t agree.

    I would expect them to keep pumping equities at least until the previous pre-gfc highs have been breached and the higher index levels stabilised.

    They also want to lift home prices to get that feel good factor flowing. The ability to refi will help so many people and release more income to flow into the economy as commitments are reduced.

    Then and only then will they consider the hand brake, although only to slow, not to reverse.

    Why would they travel this far only to falter at the last hurdle. Maybe late 2013 or during 2014 we will see some easing of policy.

    • I think you’re reflecting the mainstream view there Peter, i.e what the majority think the Fed are thinking.

      This is a market based on perceptions and confidence, not fundamentals.

      Will this be a repeat of the Greenspan put?

      Who knows – nothing is certain in Currency Wars.

      • Very likely Chris. I don’t regard the fed as a contrarian organisation, although they have been bold with the QE.

        I expect that Bernanke has a plan and some goals.

        I would expect turbulence when they do pull back, but maybe they will be able to land the ship intact – as you say – who knows.

        We are all just passengers without parachutes.

    • PF, you are merely putting lipstick on a pig.

      Forget about slowly withdrawing the punch bowl. Even a mere hint of a rumour of Fed moonwalking out of QE is enough to roil the markets.

      Withdrawing life support slowly does not stop the patient from dying. It will merely allow the patient to die slowly and painfully.

      • If you take away the emotion, all you are saying is that you don’t think they can create what we all know they can create.

        Of course creativity can be taken a step or two too far, and that’s the interesting part.

      • PF, the markets ARE about emotions – fear and greed. If you take away the emotion, there is nothing left to drive the market (up or down). If you think the Fed can create something out of nothing into perpetuity, all the best to you.

        Oh.. and there is nothing creative about kicking the can down the road and keeping the zombie markets alive. You seem to have a low threshold for what is termed as ‘creative’.

        • These days, they have a new term for fear and greed – risk-on and risk-off, mainly because there is now a single source/trigger of all the market response – Fed and all the other CBs.

        • Why can’t the Fed create something out of nothing? Creating something out of nothing is their job.

          By creating money (nothing), they induce production of something (goods & services).

    • Deus Forex Machina

      HI PF and others – I think the lightbulb has been that in trying to stabilise the domestic economy by goosing equities and driving the dollar lower and in trying to us BoC Carney’s stated policy of a set date for long term stimulus they are creating the pre-conditions for instability.

      Minsky would be having an absolute baby about what is going on as the volatility gets driven out of the market and replaced with a paradigm of the FOMC put.

      I simply think that perhaps they are seeing a bigger risk emerge and trying to take air out of the baloon slowly.

      Cheers

      Greg