Markets back in bull mode as West’s response to Crimea looks soft

March 18, 2014

It is a strange market we inhabit in 2014 when the tensions in the Ukraine and the Crimean referendum can leave the traders untroubled and back in the bull camp so swiftly after last weeks semi-aggressive selloff.

But that’s the way the market is so yesterday’s better bid tone in Asia then swept through into Europe as markets seem to cheer the lack of uncertainty that the actual result of the Crimean vote brought. And so it was overnight that risk was back on, stocks are higher and the US dollar is weaker after markets seem to be laughing at what they view as weak sanctions on 11 Russian individuals as a result of the Crimean referendum – especially the fact that Russian President Putin escaped being added to the list.

US stocks bounce from the open and have traded a fairly tight range since then. At the close, the Dow is up 176 points or 1.10%, the Nasdaq is up 0.86% and the S&P 500 has regained a fair chunk of Friday’s loss, up 18 points to 1859 for a gain of 0.97%.

Helping the tone was the jump in industrial production which rose 0.6% versus the 0.1% expected, but the NAHB home builders index printed 47 versus 50 expected, but it was still higher than the 46 we saw last month.

In Europe, markets were focused on the lack of conflagration following the Crimean referendum and marched higher. The FTSE rose 0.61%, while on the continent, stocks rose more in a two-step process at the European open and then again when US markets opened. The DAX rose 1.38%, the CAC was 1.32% higher while in Madrid and Milan stocks rose 1.66% and 2.52% respectively.

Which means that local shares will be higher at the open this morning, with the SPI 200 March contract up 29 points in overnight trade to 5350 bid on the back of the offshore moves.

What I’m doing about the above personally

Did you read Enid Blyton’s books when you were a kid? I did and while the Famous Five were great it was the magic of The Faraway Tree that captured my imagination as a boy. But this market feels to me like we are all upside down in Topsy Turvy land and Moonface is a hedge fund manager.

I genuinely find this to be the strangest market I think I have been close to in a very long time. Back during the Nasdaq boom prior to the bust I was concentrating on fixed income and fx markets so it was easy to just say that the prices look stupid and to recall the Posseiden experience in Australia and move on.

At the time I remember thinking and saying that it was clear that the internet and associated industries were going to revolutionise our lives but it was clear how they were going to make money.

So the crash when it came was no surprise to those of us who didn’t get caught up in it.

This market however is very different.

Companies are making money even if they are missing revenues targets and only achieving earnings via tight expenditure control – it’s still profits. So as much as I reckon margin debt, leverage and the Fed’s balance sheet are a big part of this rallying market the fact is that the rally is not as tenuous as the Nasdaq bubble – not even close.

But it doesn’t change my level of disquiet over this stock market move or the risk on that we saw last night and because of this I am cutting my equity position to zero this week. I know that I might miss a big rally and I know that this move can continue while soever the free money culture of the Fed and other central banks continues.

But I don’t understand this market why it can ignore the Russian Bear who is pushing and pushing to expand his sphere of influence, I don’t understand why 100 years after Europe slid into the First World War, a War that could and should have been avoided noone sees any parallels and I don’t know why Obama is playing so softly on this when the Crimean referendum could be just the thin end of the wedge.

When I don’t understand I don’t play – particulalry when all my technicals scream caution.

Anyway back to the markets overnight and the Aussie dollar is higher at 0.9084 on both the risk-on meme and Westpac chief economist Bill Evans’ change of interest rate call  from another rate cut later this year to a period of stability before rate rises in the second half of 2015. The Aussie sits at 0.9085 this morning.

Elsewhere on  currency markets, the euro rallied again up above 1.39, even though inflation has dropped to 0.7% in the EU against expectations of 0.8%. Of course, traders in usual circumstances might be worried about deflation in the EU. But for the moment it is weakness in the US dollar that is driving markets.

GBP sits at 1.6635, USDJPY rallied to 101.73 while the Aussie, as noted above, is higher this morning also. On the crosses, AUDJPY rallied sharply to be at 92.42, AUDEUR is up to 0.6527 while the Aussie also rose against the Kiwi to 1.0606.

On Commodities, it was an ugly day for Gold as fear washed away. After making an early high around $1390 oz, Gold is sitting at $1366 this morning.

This chart speaks for itself – gold is in an uptrend, roughly ran into trend resistance yesterday and has pulled back. Support $1345/50.

Nymex crude is off 0.86% to $98.04 and Copper has slipped back a cent to under $3 again at $2.99 lb. On the Ags the volatility continues with Corn down 1.7%, Wheat off 1.86% and Soybeans up 0.23%.

On the data front, the RBA minutes will be pored over this morning for clues on the dollar and interest rates. European trade and the ZEW business surveys for Germany and the EU will also be important. In the US, the CPI data is very important also for the Fed and policy, with this week’s meeting of the FOMC and a very low number might, at the margin, impact the size of the taper. Also of interest to traders, after the mysterious $100 million change in Fed custody holding last week.

Have a great day and good hunting

Greg

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