2013 is going to go down in my life as the year that I discovered that the creatures of Enid Blyton’s “Magic of the Faraway Tree” that I read as a boy are real. Most poignantly real in 2013 is Topsy Turvy land where everyone walks on their hands and everything is upside down. Because 2013 is the year where bad is bad but bad is also good, where good is bad but good is also good. Of course I’m talking about economic releases here and how the market constantly seems to come back from the brink to find the good in the bad because it means more free money and lower rates for longer which means the discount rate on the cashflows being assessed for companies stays at or near zero for longer making those cashflows worth more than in a higher interest rate environment.
And so it was that Risk was back on and markets are more ebullient across the board overnight after the new Italian government was sworn in and a combination of low inflation in Europe and stronger data in the US buoyed the equity market bulls and growth hopefuls. That sounds more negative than it should be because the price action is just the price action and the new all-time closing high of 1594 in the S&P is the single most important signal that any trader could take away from last night as to the tone of the market.
You can argue with the price action all you like, you can point out the risks to the technical outlook if the now almost 5% lower level of 1520 breaks as we did when it got close but the reality is that the market just wants to keep going up. Indeed our Jimmy R indicator has remained in a bull trend since the 7th of December last year at 1401. So whatever the rhetoric we may feel the indicator based on one of the best long term trend followers of all time process is still shouting at us that it is still a bull market and highlights that the Barron’s front page of “Dow 16,000″ from a week or two ago may not be the top indicator that many had thought – we were agnostic because we think you need more than one magazine cover to achieve the necessary psychological settings in the market.
Anyway it was an interesting night with what might be considered weak data in Europe having a positive impact on markets because it increased the chances of an ECB rate cut. Data like the fall in European business climate from -0.75 to -0.93 or the drop in economic sentiment from 90.1 to 88.6 or even the drops in industrial confidence or the fall in Italian business confidence or the Drop in German CPI which no doubt reflects weak demand, was all taken as positive.
In the US data on personal income and spending was on balance weak with spending up 0.2% against expectations of a flat result but income grew at half the expected rate of 0.4% printing just 0.2%. Both numbers are a big step down from the February results. Pending home sales however jumped 1.5% better than the 1% rise expected but the Dallas Fed manufacturing survey plunged from 7.4 to -15.6 against +5 which was expected.
So as you can see it really is a topsy turvy land and in any other environment than the Fed’s free love and the coming ECB free love and money regime markets would be off. but they are not and you can only trade the market in front of you so whatever my rhetoric we would beseach you to do that lest your pocket book be emptied by Mr Market.
As you can see in the chart above the S&P has had a closing high but has not yet broken the top of what you might call the box it has been in for a while now between 1520 and the 1599 zone on a futures basis. A break of here would open the way to a trendline which joins the late 90′s high with the 2007 high and which extrapolated sits at 1608 on a futures basis.
Turning to FX land and the past 24 hours have seen the Aussie reject the 1.0270/80 zone which is where the long term weekly trendline sits at the moment and rally strongly on the back of the better risk tolerance in the market. Even though we were slanted the other way with our discretionary positioning in the past few days it is encouraging for traders that the Aussie is trading up and down with risk sentiment because many traders will be more comfortable with this type of price action.
The 4 hour chart for the Aussie shows it is in a nice little up channel with the 1.0371 level the top of this channel at the momentand this might be resistance today. On the dailies our usual indicators suggest a further rise in the Aussie toward the 1.0395/1.0410 region.
Euro was also higher and we have to be honest and state that we completely underestimated the positive impact that the swearing in of the Italian government. This is particularly the case because we figured given the structure of the coalition that it was unlikely to look kindly on the policies implemented by Mario Monti’s government and demanded by the Germans. Indeed new Italian Prime Minister Enrico Letta said last night that,
Italy is dying from austerity alone. Growth policies cannot wait.
Markets didn’t care and Euro rose as the chart above shows but it remains within the 1.30-32 box.
Yesterday USDJPY fell heavily to retest pretty close to our slow moving average before bouncing back – the outlook is still biased lower however and 97.00/20 remain the key supports.
On commodity markets Nymex Crude rose 1.53% to $94.42 Bbl, Gold rose 1.51% to $1475 and Silver bounced back strongly with a 3.19% rally. Copper was up 0.99% and in the Ags the unseasonally wet weather drove Corn up 6.06% which dragged Wheat up 2.79% and Soybeans up 2.88%.
In Australia we get private sector credit and then HSBC Manufacturing PMI update for China, vehicle and housing data in Japan and then this afternoon german retail sales and French Consumer spending before German unemployment and European CPI. Tonight in the US its Case Shiller house price index, Chicago PMI.