Aussie break out, stocks rally – who cares about the end to QE?

October 29, 2014

An amazing night, truly amazing.

Why traders would suddenly, just 24 hours before the expected end of QE, decide to have a risk rally is hard to fathom. Indeed markets last night acted as though the Fed is more likely than not about to hold fire and not end QE tonight. It saw the ignition of a risk on rally from currencies to stocks and bonds and in the end it was a great night on US stocks with the Dow up 188 points to 17,006 for a gain of 1.12%. The Nasdaq was up 1.74% and the S&P was 1.19% or 23 points to 1,985.

Why? These moves are hard to fathom given the fact that the data in the US overnight printed much weaker than expected. Normally you’d be forgiven for expecting such data to knock stocks but Wall Street rallied hard and the US dollar sold off. Specifically durable goods tanked 1.3% in September against an expectation of a rise of 0.5%. Case Shiller house prices also missed expectations rising just 5.6% year on year but consumer confidence was 94.5 against 87 expected.

These moves are hard to fathom given the fact that the data in the US overnight printed much weaker than expected. Normally you’d be forgiven for expecting such data to knock stocks but Wall Street rallied hard and the US dollar sold off. Specifically durable goods tanked 1.3% in September against an expectation of a rise of 0.5%. Case Shiller house prices also missed expectations rising just 5.6% year on year but consumer confidence was 94.5 against 87 expected.

Squaring the circle between the the weakness in durable goods a stock rally and the fall in the US dollar is difficult unless there is some small part of the market which expects that QE might not end tomorrow morning after this months FOMC meeting. That would be a huge call and is unlikely but for the moment buyers have the ascendancy.

I’m not on this move but it could head above 2000 before the reversal comes.

Likewise, European stocks were higher with the DAX up 1.86% to 9,068 while stocks in Milan were 2.36% higher and stocks in Madrid rose 1.96%. By comparison the FTSE and CAC were quiet up 0.61% and 0.4% respectively.

Locally the impact was that the December SPI 200 rose 29 points to 5,474 after the physical market managed to recover the early morning weakness yesterday. The weakness in iron ore and coal, which slipped back under $65 a tonne, overnight might be a small headwind but the market is expected to open on the strong side here in Australia.

In Asia yesterday the Shanghai exchange was on a tear rising 2.08% to 2,338, the HAng Seng was 1.63% higher while the Nikkei fell 0.38%. The news out of China was that the strength in Shanghai was related to hopes, some say expectations, that the PBOC will follow up recent economic weakness with more stimulus. It’s purely specualtive and nothing over the past 8-10 months suggests that the PBOC and Government are going to deviate from their current targeted approach.

On currency markets the Aussie dollar bears will be unhappy with the move up to 0.8881 overnight and while it has slipped back a little it is still strong at 0.8853 this morning.

We got the breakout I mentioned yesterday and 0.8920 seems the next target.

Realistically it just looks like the market got too short last week and we are seeing a reversal now. Likewise the Euro is stronger at 1.2734 and the Pound is at 1.6134. Only the Yen was weaker with a move back to 108.15 this morning.

Commodity traders are selling iron ore and coal once again with December 62% ore down 87 cents to $78.13 a tonne while December coal fell 25 cents to $64.95. Elsewhere nymex crude has a positive move, up 0.63% to $81.51 and gold is at $1,228. Copper has broken out and is at $3.09 a pound this morning while on the Ags soy beans gave back a tiny bit of yesterdays huge rally losing 0.56% but corn was 0.44% and wheat rose 1.68%.

On the data front the cupboard is bare again in Australia today but the Westpac MNI China consumer sentiment survey is out at 12.45 today. The big event of the next 24 hours of course though is the FOMC meeting.

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