Vantage FX | Fed to keep buying bonds, Euro up | 21st March 2013

March 21, 2013

Well, the Cypriot vote against the bail out happened more than 24 hours ago and the world didn’t end. This fact seems to have buoyed traders in the northern hemisphere who pushed stocks higher and took the Euro and Sterling up and pushed gold down. Of course any one days trade is just noise and the emotional roller coaster may just be at a high point once again but for the moment the glass is half full not half empty.

The rally started in Asia with some strong results in Shanghai which was up 2.64% with this better tone helping drag the Australian market off its lows and gave the Aussie dollar a little nudge higher also. As Europe entered the fray it felt like traders looked around the room and saw no panic so decided to hit the green buy button not the red one to sell with stocks up from the get go. At the close the CAC and stocks in Milan finished on their highs up 1.44% and 2.2% respectively but the DAX and Spanish stocks finished mid range up 0.68% and 1.14% respectively.

In the UK stocks were lower after Chancellor of the Exchequer George Osborne releases his budget where the outlook for growth was downgraded for 2013 to 0.6% from 1.2% previously. He did however urge that his government was “slowly but surely fixing” the economy, although cutting his 2013 growth forecast to 0.6% from 1.2% estimated as recently as December 2012. Also of note was the fact that his changes for the BoE’s role in the economy were not as radical as some feared with the inflation target remaining at 2% but with a little more leeway around the central tendency.

Of course that is just a reflection of what current BoE Governor Meryn King has been doing since 2008 so it was no big deal. At the close the FTSE was down 0.13% and Sterling was up to 1.5185 at one stage but sits at 1.5110 as we write. Another wild night it was with a range of 160 points for a mid range close which we think is still positive if not a little indecisive as you can see in the candlestick in the chart below.

Stocks in the US added to gains after the Fed reiterated its commitment to the $85 billion of monthly asset purchases for the foreseeable future. Indeed in forecasting that the recovery is under way but that risks remain while not expecting the unemployment rate to hit 6.5% until 2015. So the Fed will be, or is at least expecting to be, buying lots of bonds for a couple of years yet.

This is kind of like the perfect world for stocks if that is the case, a recovery that is modest enough to stay the Fed’s hand but strong enough to give stock investors hope of further capital gain. It doesn’t mean that stocks will roar necessarily but it makes it much harder for the preconditions for weakness to become apparent. Unless of course Fed Ex’s earnings report is a precursor to disappointment.

At the close the Dow was up 0.39% to 14,512. The Nasdaq rose 0.77% and the S&P 500 was 11 points or 0.69% at 1,559. Fed Chairman Ben Bernanke said on Cyprus that he was watching it, hope the Europeans would come up with a “sufficient and equitable” solution but at the moment it didn’t pose any threat to the US economy. Our emphasis obviously but one would hope that the Europeans got the message.

On FX markets the lack of Cyprus induced panic let the Euro off the hook and it is up 0.48% to 1.2942 this morning up almost 100 points from yesterday’s low around 1.2850. Euro is a bit messy at the moment and our view it was headed to 1.2650 is being challenged by last nights rally. We will be wrong if Euro can trade up and through the 1.3000/25 region.

The Aussie dollar was higher on the day but is off its high of 1.0404 sitting at 1.0377 as we write. The Aussie is dancing on the spot at the moment and has been in a 4 hour uptrend from the lows above 1.01 back in early march. A break of this trendline at 1.0353, so give it 7 points and call it 1.0346, opens the way for a deeper retracement. Don’t forget though as we always say respect the trend until it breaks.

On commodity markets Nymex crude was up on the back of a big draw in stocks with the price rising 0.87% to $93.24. Gold was lower with the Euro up but at $1606 it still looks strongish.

Data 

Kiwi GDP is out today, HSBC Manufacturing PMI for China before a raft of preliminary PMI data in Europe tonight. In the US its jobless claims, Existing home sale and the Philly Fed index.

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