Vantage FX | Stocks and Aussie Dollar head over the fiscal cliff | 8th November 2012

Yesterday I said I had no idea why the markets rallied and in my experience that is always a warning which is why I argued that the rally yesterday was  ”pre-emptory given the final ballot in the US election has not been cast and the fiscal cliff still looms.” And so it was overnight that Stocks, the Aussie dollar, Oil and the EUR got slammed off their highs.

Steve Russolillo writing in the Wall Street Journal this morning put the fall that we saw in the Dow overnight which at its worst was down 369 points or 2.8% in context,

Excluding the mid-2008 through March 2009 timeframe (i.e. the worst of the crisis), the S&P 500?s 2.7% decline is a larger decline than 99.4% of all days since 1950,

He also reflected on what happened in 2008 saying,

In 2008, the Dow rallied 305 points on Election Day as investors prepared for an eventual Obama victory. But then the Dow tumbled 486 points the very next day after he was elected president. It then dropped 443 points the day after that.

For mine the focus is now firmly on the fiscal cliff and the problems there. In many ways the resolution of the Election, even though nothing really has changed in US politics insofar as we have the same President and the same party in control of both the Reps and the Congress, does actually open the way for a move towards conciliation over the cliff. I say that because the republicans have no reason to obstruct now and Obama has every reason to compromise as he eyes his place in history – we’ll see but for now markets are worried.

Datawise it was not an overly good night with the European Commission downgrading its outlook for growth in the Eurozone saying that 2012 would be weaker than previously thought and growth over the next 2 years slower than previously thought. Elsewhere German Industrial production for September printed a negative 1.8% number against expectations of -0.5% and from -0.4% last. This is an appaling number and I am reading that many pundits are now worried that Germany is being dragged into the Mire with the rest of Europe. There is no doubt about this fact and one of our favourite charts is the relationship between German Exports and the Chinese Leading indicator which shows a very strong lead lag relationship as you can see below. Germany isn’t being dragged into the mire – its firmly stuck in it already.

German Exports and Chinese LI

This chart and this relationship – I’m happy with the correlation and causality – shows ECB boss Mario Draghi’s comment over night that “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy,” as a clear indication that European policy makers still can’t see what is going on around them.

Stocks

At the close of play European stocks were sharply lower. The FTSE fell 1.58%, the DAX was 1.57% lower while the CAC dropped 1.49%. Madrid got it right with its fall yesterday and was off 1.66%. Italian and Spanish 10 year bonds were up slightly to 4.85% and 5.68% respectively with German 10 year Bunds down 0.07% to 1.38%. Gilts in the UK had a similar fall dropping 6 basis points to 1.76%.

In the US at 7.00 am EDT and 1 hour before the close the S&P 500 is down 2.19% to 1397 and now below the crucial 1400 support. As I noted yesterday I’d argue that overall the S&P 500 has started a down trend on the dailies and the price action when you combine the night trade with the day trade leaves a very very ugly chart pattern even if the S&P does look like it might have reversed of the bottom of the down trend for the moment with last nights low.

The Dow is off 2.20% as I write and the NASDAQ is down 2.38%

Asian markets are likely to get slammed today as well as they reverse yesterday’s more positive close. The Nikkei closed flat but the Hang Seng was up 0.71%, the Kospi rose 0.49%, Straits Times 0.79% and Bombay rose 0.45%. In Australia the All Ords was up 0.68% to 4534 and when I look at the futures overnight it is obvious it was a fraught nights trade but the key 4425 level was not touched. this remains the key for us.

FX Markets

The US dollar dominated trade overnight with risk off and the Euro hit by the recognition that Europes big economy is not going to escape the wider European economic troubles. The USD Index is in an uptrend and as I have written recently I think there is still substantial upside for the USD over the week’s and months ahead.

Looking specifically at the Euro we can see what a bad day it had with a high at 1.2876 before it fell all the way to a low of 1.2734 where it found some support from technical traders buying off the 38.2% retracement level of the July-September rally of the Euro. 3 days now below the 200 day moving average and with my system short and looking for the Euro to accelerate to the downside suggests to me this move is not finished yet.  The Pound also was hit reversing off a high of 1.6042 to hit a low of 1.5951 but it sits at 1.5980 at present and is off just 0.11% as opposed to the EUR which is down 0.41% at 1.2760. Have a look at EURGBP – it looks to us like it might be accelerating to the downside.

For the Australian dollar it was an ugly reversal of fortune as it pulled back from the high at 1.0480 to trade at 1.0395 for the low of the night. I heard from a mate in the wholesale markets that importers were all over the Aussie last night at and above 1.0470 (importers sell AUD and buy other currencies) which is interesting and tells you something about their view of things. But equally I’m guessing there will be plenty of long term portfolio buyers in the 0.9970-1.0150 region as well if the AUD pulls back that far.

Commodities

Like the other risk or growth style assets that were pummelled crude was hit hard with the backdraft of the risk off move but also from the increase in crude oil supplies of 1.8 million Bbls against the 1 million increase the market had expected. Funny how data sometimes reinforces price action and we saw crude futures for December delivery off 4.18% to $85.11 Bbl.

Gold also had a volatile day trading up to $1730 oz and down to $1703 but is currently mid-range around $1714. A very ugly candlestick and one perhaps and candlestick aficionado might be able to give us some guidance on. Silver had a similar type of price action and sits at $31.83 oz as I write.

The Ags were little changed but copper has broken lower making a new low for the past 2 months and our systems remain short this one even though the momentum is fading a little.

Datawise I’m looking at the NZ and Australian unemployment rates today as this is a good indicator for AUDNZD. Overnight we’ll get an update on German import and export data together with the BOE decision tonight. In the US jobless claims and US trade balance are the headlines while in Canada we get housing starts and new housing price index.

Thoughts, comments, queries together with frank and fearless feedback all welcome. I’m happy to answer questions or comments on the comment stream wherever I can

NB: Please note all references to rates above are approximate and should not be used for trade reference.