Macro Morning: Central banks want stocks lower

morning1211

With so many Fed Governors talking this week I thought we would get soothing words from them so as to not spook the market any further than it had already been but in the release from the BIS over the weekend, in the statement from the PBOC yesterday and in comments from two senior Fed Governors overnight I see almost the exact opposite to what I had expected.

Clearly there is a global central bank compact that has emerged which says that stock and property market bubbles are not the way to get a sustainable cure to the economic woes of the globe (RBA and Australia’s FIRE industry spruikers take note) and central banks are fed up with inter-governmental ineptitude and with their actions being used by the political class to prop themselves up via the goosing of housing stock and stock markets.

I believe that this is at the heart of the taper, probably more so than the economic recovery, so it is not unexpected that even though the Fed is being very transparent in what it wants to do, which is really taking air out of stocks without popping them, the risks are that  markets overreact.

Overnight combative Dallas Fed President Richard Fisher didn’t miss when he told the Financial Times:

Markets tend to test things…We haven’t forgotten what happened to the Bank of England [on Black Wednesday]. I don’t think anyone can break the Fed?…But I do believe that big money does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they’ll go after it.

There you go he says it later but the Fed recognises that there is going to be some blow back from what they are doing and it seems they are ready for it. Indeed this was a message that non-voter this year Narayana Kocherlakota from the Minneapolis Fed said he wasn’t overly worried about the markets reaction:

I think what we’ve seen so far is not a cause for concern but obviously if these higher yields were to harden over a longer period of time that would be restrictive to economic conditions, suppressing demand and thereby suppressing employment

What interesting times we live in – grab the popcorn and stay close to the screen.

But as you know it’s not all about the Fed and the Chinese decision to tighten and tighten aggressively yet signal that there is ample liquidity as they did yesterday implying the foot stays on the throat of shadow bankers and property spruikers hit the Shanghai Composite hard as it closed down 5.31%.

The rest of Asia was down in the 1-2% range which put pressure on European stocks which were down across the board. The FTSE fell 1.43%, the DAX fell 1.25%, the CAC dropped 1.70%. In Milan stocks were only down 0.94% while in Spain stocks fell 1.91%.

So from the open US stocks were under pressure and the the Dow traded down to a low of 14551 before rallying back toward the previous weeks close but ultimately closing at 14660 down 139 points or 0.94%, the Nasdaq fell 1.08% and the S&P mapped a similar path to the Dow with the physical closing down 1.22% at 1573.

Looking at the futures version of the S&P though as highlighted in my VantageFX MT4 chart below you can see that the trend line from the lows of last year is well and truly broken and lower levels beckon.

s&p 500, spx, s&p 500 chart, daily

Based on my usual process and over many weeks the outlook is now for a move back into the 1500/10 region, then 1470/80 which is big support and then ultimately a target might be 1330/60 the bottom of which if it breaks opens up a move below 1000.

Looking at FX markets, the US was on the ascendancy early before reversing course late in the day which is kind of hard to fathom given the Dallas Fed data which showed a huge leap from -10.5 to +6 last month. But anyway the USD was under pressure and we saw some wild and volatile ranges – AGAIN.

Euro made a low of 1.3058 before rallying to 1.3144 and it sits at 1.3124 this morning, still looking wobbly on the dailies I reckon though. The pound had a big range as well trading 1.5342 – 1.5465 and it sits at 1.5438 this morning also looking vulnerable on a multi-day time frame. The yen also lost ground and then recovered trading 97.21 – 98.70 and then back to 97.67 where it now sits. USDJPY needs to take out yesterday’s highs again soon or it is at risk of a very big reversal lower – as counter-intuitive as that is.

For the Aussie it was a tumultuous day. On Saturday morning early doors the Aussie was closing in New York in the 0.9230 region before being sold down to a close at 16 and an open yesterday morning just below 0.92. It then traded up to the top of a 4 hour box in the 40’s where it met resistance and then as the US dollar was strengthening across the board the Aussie got absolutely smashed back to a low of 0.9145 just 1 point above my stop loss on yesterday’s long.

aud, audusd, australian dollar, australian dollar price quote, audusd 4 hourly

As I went to bed I thought if it was going to recover it would get to about 0.9302 so I placed a take profit at 0.9289 which was triggered on the run to the high of 0.9299 and it has now slipped back below 0.9250. The 4 hours still suggest a bit of a rally and 0.9302 remains key topside resistance with support 100 points lower.

Dr Copper was down again overnight falling 2.28% as the Chinese and Fed actions, no doubt along with the words of the BIS reverberated around investors heads. Gold was off 1.15% to $1282 OZ and silver fell 2.33%. Crude danced to its own tune as usual up 1.59% while corn and wheat were both down but soybeans rallied.

Data

Business Climate in France, Retail sales in Italy, Spanish Bond Auction and then Durable Goods in the US and Housing Prices as per Case Shiller and New Home Sales and the Richmond Fed index.

But of course we’ll all be watching the Shanghai stock market.

Twitter: Greg McKenna

Comments

  1. migtronixMEMBER

    Nice run down, great read with my coffee. Boy if CBs want prices down we’re screwed because they will not control the exits, they will be run over! Strange what happened to cable coming back surprised me to see it green this morning. I still think they can’t deflated prices without sending bonds to the moon, it will be wholesale sell off like money markets in 08.

    Oh and nice job taking some profit on aud

  2. “..central banks are fed up with inter-governmental ineptitude and with their actions being used by the political class to prop themselves up via the goosing of housing stock and stock markets.”

    Really, do you think central banks care much about people? How are they USED by the governments, when they all are independent and they defend only the banks interests and the financial sector wealth?

    Please explain how they are USED by the governments.

    • Deus Forex Machina

      Hi Lori – yeah I do.

      I strongly believe that the Central bank credo is akin to the hippocratic oath, or at least the bit that says dont harm the patient.

      Whether it is the Fed, the ECB, the BoE, RBA et al they have all acted in what they saw as the best interests of the economy – for better or worse and whether you agree with them or not.

      But what Governments all around the world have done is take the foot off the necessary reform agenda and left it up to the CB’s to keep priming the pump and goosing the economy.

      Obama could have reformed finance and chose not too, the EU could have reformed but got an OMT instead, Government’s in Australia have used the rise in wealth of housing to mask structural problems with debt and leave the budgetary coffers empty by creating middle class welfare to get themselves re-elected.

      I could go on forever and end up with a PhD dissertation but in the end the reality is that for decades now the governments of the day have been using central Bankers to even out the economy while they muck around or ignore big structural economic and budgetary issues.

      So yes I do believe that governments use central bankers and I think that central bankers – who lets face it at their core are doctrinaire academics – have had enough and are pushing back for the greater good

      • Hey Gerg, great write up and EXCELLENT points. I’ve had it with everyone pointing to stocks, gold, bonds or real estate and villianizing (new word) the central bankers for bubbles or busts. At the end of the day, the Fed, ECB and RBA are looking at the charts we are and trying to make sense of the world. You can see this when Bernanke said he was ‘puzzled’ by higher yields (I am too: removing stimulus amidst a global slowdown is clearly deflationary). At the end of the day CBs have very limited power – pulling back now both preserves firepower for later (in case PBOC loses control) and might force political reforms. Also worth noting that CBs aren’t elected, so the blowback from recession hits politicians.

        Apologies for rambling, I’m on the us east coast so this is happy hour for me. But very glad you made these points and a proud reader of MB – you guys do a great job.

      • Deus Forex Machina

        Thanks St MAtt…good ramble and I agree with you 100%

        It always easy to blame the CB’s but for th most part I think they try their best in the public interest.

        Doesn’t mean I always agree with them – i have my biases they have theirs – but I know they do as well as these biases allow them to.

        Note to RBA to watch housing Spruikbots 🙂

        Cheers

        Greg

  3. Hello Greg. Enjoy your reports. I’m interested in trading some forex. Could you recommend a website? I’m based in Melbourne. Many thanks.

    • Deus Forex Machina

      Hi mate – email me greg at globalfx.com.au with what you are looking for and i can help out.

      Cheers

      Greg