Stocks reversed the mid week swoon on Friday and the UK lost its AAA rating amid talk from Fed officials that the FOMC is not about to rush to exit its policy stimulus any time soon. In what looks like a fairly light start to the week economically we’ll hear from the Fed Chairman Ben Bernanke this week (Tuesday/Wednesday US time) when he walks up the Hill to give what used to be called the Humprey Hawkins testimony to congress. Our guess is after seeing last week’s fall in equities and increase in tension in the market he will try to soothe fears of an imminent withdrawal of stimulus.
Certainly the market will be looking for this type of reassurance and if he fails to deliver then this is a big risk for stock markets and possibly a big support for the US dollar. But all things being equal the more likely outcome is stocks to be supported by Bernanke and the US dollar slightly undermined.
Looking back to Friday the big news for FX markets was that the UK has been downgraded one notch by Moodys Investor Services from Aaa to Aa1. Moodys said that
The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy,
The UK has been struggling to exit the economic weakness for years now and is at risk of slipping back into recession. Outgoing BoE Governor King has had his go at unconventional monetary policy and ran inflation at 4% for quite some time but monetary inflation is hard to encourage when the underlying economic demand remains weak. So incoming BoE Governor Carney is likely to do something extremely interesting and unconventional which is likely to put further pressure on the Pound which has now broken both a big uptrend from the 2008 low as well as down through the bottom of the channel it has been in since mid 2010.
As we noted last week we are now targetting a move of about 10 big figures toward 1.42 over the months ahead.
Looking at the dailies GBP is very over stretched with the crash of the last week which took it from the previous Friday’s close above 1.55 to approximately 1.5150 last week.
Of course everyone is going to be focussed today and probably the next few days on the Italian election and whether the outcome gives more or less clarity to the chances of Italy sticking to the deals entered into and the policies undertaken by the Monti Government. Indeed it is worth noting a Wall Street Journal article over the weekend with Bernard Connolly was running the European Commission’s Monetary Affairs Unit when he was sacked 17 years ago for saying that the Euro would usher in a crisis eventually.
It is an article well worth a read but we thought that we’d highlight a point worth remembering both given the election and the trend over the past 3 years for Europe to blow up around April May. Connolly was quoted as saying in the article,
The European political class, he says, believes that the crisis “hit its high point” last summer, “because that was when there was an imminent danger, from their point of view, that their wonderful dream would disappear.” But from the perspective “of real live people, and families and firms and economies,” he says, the situation “is just getting worse and worse.”
Protests around the zone over the weekend about austerity programs and the loss of Britains Aaa rating show the bind politicians are in. They don’t seem to be able to win either way and in time might loss their careers.
Which brings us to the Euro which was saved a little by the stronger than expected IFO Business survey in Germany which printed 107.4 versus 105 expected with the expectations component also strong printing 104.6 versus 101.3 expected.
We are looking for a test toward 1.3016 this week prior to Bernanke’s speech which could be a good catalyst for a change.
The Australian dollar took on all comers last week rallying against the Major crosses as you can see below.
RBA Governor Steven’s sanguine comments about the Aussie which implied neither that it was overvalued nor that the RBA were inclined to intervene kicked the Aussie higher on Friday as did his somewhat even handed outlook on interest rates when he said that an easing was more likely than a tightening. This was in some quarters taken as a warning to the interest rate bulls but as we noted in our Weekly Summary, the market is a little divided with NAB reckoning he is still going to ease while the CBA seems less inclined to think so.
As can be seen in the chart above the Aussie is ping ponging within quite a wide range and although Friday night’s close was not that flash in terms of where it has been a few hours earlier the daily charts are building momentum. But unless or until the box breaks its just a wild roller coaster ride around the same track again and again and again.
Turning to stocks there was a relief rally on the back of the German IFO data mentioned above and some dovish comments from the Fed Brotherhood in the US. After the swoon mid-week the Dow closed the week up 0.87% at 14,001, the S&P regained 0.9% of the previous two days 1.9% loss on Friday closing up 14 points to 1,516 while the Nasdaq was 0.97% to 3,162.
In Europe there was a strong rally with the FTSE up 0.71%, the DAX up 1.03%, the CAC fairly roared up 2.24% with Madrid up more than 2% as well while in Milan stocks rose 1.40%.
On commodity markets gold is sitting at $1,572 oz this morning after it tried to climb back inside the down trend but was likely rebuffed both by the technical damage done to the price during the week but also with the equity rally reducing the need for the golden safe haven. Gold’s outlook in many ways rests not with itself but with other markets in the days ahead. Silver found some support for the third day in a row around $28.30 oz in MT4 pricing terms. Crude had further weakness below the previous day’s low but recovered to have a small rally on the day closing at $93.36. Soybeans fell 1.78%, Wheat dropped 0.87% and Corn was largely unchanged.
The Italian election is front and centre in our time zone today if/as news filters out about the results.
HSBC Chinese M’fg PMI is out with the Chicago Fed National Manufacturing Activity index out tonight together with BoC Governor Carney’s speech which will be interesting to hear.