Summers rally holds for stocks but fades on bond and currency markets

September 17, 2013

Interesting moves in Asia yesterday with the  Larry Summers rally reverberated outward and through Europe and into the US as stock and bond markets rejoiced that a perceived hawk was not going to get the top job at the Fed.

There really wasn’t anything to compete with the Summers story although it is worth noting that while stocks closed higher the bond market rally gave up most of its gains by the end of play. Speaking of which at the close the Dow was up more than 100 points or 0.77%, the Nasdaq fell 0.11% (Apple) and the S&P 500 broke but couldn’t hold 1700 finishing up 0.59% at 1698. In Europe it was green across the board but the FTSE lagged again rising only 0.6% while the DAX was 1.22% higher and the CAC rose 0.91%. In Milan and Madrid stocks rose 1.05% and 0.65% respectively.

On FX markets the US dollar was hit hard initially but has regained some ground this morning with the Euro (1.3332, +0.2%) 50 points off its high, with GBP (1.5897), Yen (USDJPY, 99.13) and AUD (0.9309) also well off their respective highs.

Markets make a fool of you some times

Yesterday I said the Aussie was under pressure and might get back to 0.9175 but then the Summers news hit the headlines and it traded up to 0.9369 in Asia and then 0.9387 in European trade. It’s 0.9314 now so I am guessing that there are a lot of unhappy traders out there and this strategist (not trading at present as I am in Fiji with the family) looks a bit like a clown.

But the reality is that sometimes stuff in markets just comes through and surprises you – I’m not sure whether the Summers thing is a black swan or not but the impact certainly was. Asian Mondays are notoriously volatile so it came at an opportune time to cause the most disruption to the market. I’d posit had the announcement come in US time overnight there would have been a reaction but nowhere near as large on global markets.

But it is what it is and even though traders who were stopped out of shorts and or into longs will be filthy with the timing and the price action the reality is that is what stops and money management are for. Sometimes they work counter to intentions and sometimes they feel like they have ripped you off – but they are the safety net under your capital and a must.

What now for the Aussie?

Technically on the short time frames the Aussie is very messy – but there is a massive gap to fill from yesterday’s leap higher as you can see in the daily chart below and I often, actually always, pretty much believe gaps get refilled in time so the chance of a push lower still remains.

Adding to the potential downside is that the daily is one ugly candle – so maybe the RBA minutes at 11.30 today might just be the ammunition the bears need to knock the Aussie for six.

Sterling is on a tear

Sterling has been one of those currencies that I was sure was going back to 1.48 some time ago but it has continued to defy gravity as the data flow has materially improved relative to both expectations and the rest of the world.

Writing overnight the ANZ strategy team said,

Sterling remains well supported and presently there is no definitive reason to fight the breakout following the move above 1.57. In summary, we acknowledge the current dynamics driving the pound and could foresee conditions under which it may appreciate further to the low 1.60s vs USD. However, we are wary of the potential for sentiment to shift against sterling should underlying economic headwinds re-enforce themselves.

In the short term though it just might be that GBP has run into resistance as you can see in the chart below.

Is it worth shorting now? Maybe the stop levels are clear as you can see in the chart above.

On Commodity markets Nymex crude lost 1.74% to $106.33 Bbl, Gold is at $1312 oz, Copper is at $3.23 lb. Our friends the Ags are at it again with Soybeans off 2.39%, wheat hardly moved and corn fell 0.44%

On the Data front the Minutes to the RBA meeting are out at 11.30 while elsewhere Korean PPI is out, the BoE quarterly bulletin also and then new motor vehicle sales in Australia. Chinese leading indicators and Foreign Direct Investment will be interesting as well and then onto Europe where we get EU current account, UK CPI and PPI, the ZEW Survey for Germany (huge) and then US CPI (also huge) and the NAHB Housing Index.

Good Hunting and have a great day

Cheers

Greg

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