With the benefit of hindsight it seems we can now say that there was much more of China in last week’s sell off globally than we might have thought. Further easing of monetary conditions yesterday set the scene for a better performance across the region, in Europe and then in the US even though the Q1 GDP in the US was revised down from 2.40% to 1.80%. US Treasuries didn’t miss the import with the 10 year rallying to 2.54% down 7 basis points.
Gold was the stand out mover falling out of bed down 3.85% to $1226 and the massive, very massive support level to watch now is $1157 which I will discuss below. On FX the USD did better against Europe and while the Aussie was largely unchanged the spotties and probably some end of financial year flows, spot date Friday, had a field day chasing weaker shorts out of the market and running up to a high of 0.9344 before dropping back to this mystical 0.9350/70 region where it has been comfortable for a few days now.
USD GDP weak and a Hawkish Lacker tries to bring perspective to the Taper.
Well what can you say about the 3rd read of GDP in the US which showed a fall back to 1.8% with the household sector the big driver of this fall being revised to 2.6% from 3.4% at the last lead. It is an interesting time for the US economy, it is clear that it is doing better in its own right and relatively to other jurisdiction but the question of escape velocity is something altogether different and while I’m not convinced it’s there yet it doesn’t mean the Fed isn’t going to continue to talk of and then actually begin to taper its bond buying.
This latter point was one that even the hawkish Jeffrey Lacker President of the Richmond Federal Reserve was at pains to make last night when he used slightly less effusive language that his colleague Richard Fisher who called the market feral hogs when he said the the market was way ahead of the Fed on the pace of tightening. He reiterated that the Fed was not about to shrink its balance sheet anytime soon – but that still says they are going to taper and as I have shown before it is not the stock of the Fed balance sheet that has been important for US equities over the past 4 years since QE started but the flow of the Fed’s purchases. So a slowdown and then eventual halt to bond buying undermines stock market prices all other things equal.
Overnight however the Dow was higher, up 150 points or 1.01%, the Nasdaq up 0.84% and the S&P up 15 points to 0.94%.
Even though fundamentally I don’t trust this rally the reality is that on the charts it looks like it might have legs to get to 1606/1626 if it can get through this zone where it closed and which is identified by the orange line on the chart.
In Europe things were super ebullient with the Gfk Sentiment index printing better than expected at 6.8 from 6.5 last but China helped and the tone in the US no doubt did as well. At the close the FTSE was up 1.03%, the DAX rose 1.66%, the CAC was 2.09% higher and stocks in Milan and Madrid rose 2.04% and 2.83% respectively.
USD beats up Europe and the Aussie squeezes the shorts.
The Euro, GBP and CHF are all under pressure from the USD at the moment and it is interesting to see the obvious discernment of cash in markets as money managers and traders are clearly trying to pick winners at the moment. On that basis the US does look better both fundamentally and technically against Europe and overnight the Euro fell to 1.2983 and the old trendline you can see on the chart below comes in at 1.2940 and is and will be an important support level. I remain overall bearish Euro.
Sterling also looks weak and like it is on its way to 1.50 and below. USD/JPY stalled for a bit and a break of either 96.95 or 98.65 is needed for the next volley in either direction.
On the Aussie the idea that the Prime Minister makes any difference to currency traders is a bit of fun but largely rubbish. Politics in Australia does not normally interfere in markets, at least not since a budgetary Senate impasse back in the 1990’s. But that is not to say the Aussie was passive last night as it looks a lot like some end of financial year hedging might have gone through for spot settlement on Friday the last day of the Financial Year for Australia and it seems that the Spot Desk’s, either anticipating this flow or seeing it on their books squeezed the shorts extremely hard driving the Aussie to a high around the London close suggests this hypothesis might have some legs.
As you can see the Aussie is trending vaguely higher on the hourly charts ever so slightly – 100 point ranges have been the order of the day the last week or so so maybe 0.9343-0.9445 today.
Gold tanks and is on its way to test long term support
The Gold price fell heavily out of bed in Asia yesterday morning so it was really strange that the Aussie dollar did as well as it did – hence my conspiracy theory I guess – anyway it looks terrible and as you can see in the chart below it is now approaching big support at $1157 which is the 61.8% retracement level of the big upmove. If that breaks, IF IF IF, then it is below $700 as a target.
Kiwi exports and Business Confidence, French Confidence, German Unemployment, UK GDP – watch out GBP – Euro sentiment and business climate and then US personal consumption and home sales.