The fact that Italy got its bond auction away and Fed Chairman Bernanke, for the second day in a row ,reiterated the commitment of himself and the Fed to drawing out the stimulus policy until the economy is on a self sustainable footing was a boon to stocks which have rallied hard in northern hemisphere trade overnight.
But while stocks rose from where we sit it was a very interesting night which speaks volumes of why the US dollar is probably going to continue to trend higher against the Euro and why Europe really is a basket case who’s currency is worth 10-20% less than its current value.
Data in the United States was a recovery booster with Durable goods ex-transport rose 1.9% which was much stronger than than the market expectation of 0.2% and builds on the solid 1% increase in December 2012. This is the best result since late 2011 and another indicator that the US economy is healing but also a warning to the politicians that this sequester and the cuts that are coming from the end of this week risks derailing the economy as it just really starts to be showing signs of significance.
Also out in the US was Pending home sales which increased 9.5% year on year in January which is reportedly close to a three year high.
In Italy Comedian turned politician Beppe Grillo made it clear he is in no mood to negotiate to form an Italian Government on his blog where MarketWatch says he called the putative PM Pier Luigi Bersani a “dead man talking” and a “political stalker”. But he did tell the BBC that he expected Bersani and Berlusconi to cobble together an agreement to form a Government to which Grillo’s 5 star party would then play the role of opposition. This didn’t hurt Italy’s ability to issue bonds however as they managed to get €6.5 billion away even if they were isued at a substantial increase over the previous auction. Italy paid 4.83% for 10 year bonds and 3.59% for 5 year bonds.
But to put that Italian rate in context remember that in Australia our 5 year bond rate at the moment is 2.88% according to Bloomberg so Italy is hardly being hurt by the extra yield.
Elsewhere in Europe in yet another sign that the political class has completely disconnected itself from the population of Europe European Commision President Jose Manuel Barroso said that EU leaders should not give into populism and should stay the path of austerity so that Europe can be put,
back on the path to sustainable growth.
We won’t rant about the fact that you can’t austerity your way to growth. We won’t rant about how undemocratic it is to tell the population of Europe that they will not be listened to and we won’t rant about how this blinkered view is inevitably going to lead to more not less instability if the Italian vote and recent southern European protests are any guide. Britain has lost its AAA, France has lost its one too and is slowly slipping further into the mire and German growth has not recovered as hoped with the Chinese soft landing but has rather been dragged down by the troubles surrounding it.
All of which is a short form of a longer piece which would argue that the US dollar should rally, and rally hard, against the Euro over the months ahead.
As you can see in the chart above the Euro looks like it is making a round trip to the levels from which this rally started around 1.2650 last November. It has conclusively broken, retested and rejected the uptrend over the past week or so and while a small short term rally from here looks likely it would still be consistent with the overall bearish outlook the longer term view is for a move back down to the 200 day moving average at 1.2875 in the first instance.
Turning to other FX rates the Aussie was under pressure again yesterday and then in early European trade. Having traded down to 1.0199 on Tuesday night the Aussie rallied back into the 1.0220/30’s before sliding around 6.30/7.00 pm Sydney which is about the time that markets really kick off in the UK. The selling was relentless and pushed the Aussie down to 1.02 where it found support initially and then until lunch time London when the US wandered in and support was found around 1.0180. from here it rose steadily back to 1.0200/10 before launching itself to 1.0245 in the past hour.
That’s not a bad ride for the Aussie and Aussie traders and the strength this morning seems related to the strong rally in stocks and most probably spotties coming for the morning and deciding on a little stop run. Why not – it’s what I would do in their position.
The interesting thing is that the old trendline that I have left on the chart was the top of this run. Looking at my 1 hour trading approach it looks like the Aussie might have some ability to push through on the day and maybe head toward 1.0260ish.
On other FX markets the Yen has sold off at the same time as the Aussie’s rally this morning and is back above 92 having spent a lot of the past day below this level. It has been ebbing and flowing around this support zone since it broke the other morning and how it closes the week is crucial to the near term outlook. The question for traders is whether USDJPY is still a buy the dip or a sell the rally. We favour the latter at the moment.
Turning to stocks ebullient is a word that doesn’t even come close to explaining what happened on European and US bourses last night. At 7.21 Sydney time with 39 minutes to go in US trade the Dow is up 190 points or 1.37% and back above 14000. The Nasdaq is up 1.51% and the S&P 500 has risen a massive 22 points or 1.47% to 1519.
In Europe Madrid was up 1.96%, Milan up 1.77%, Parisian equities rose 1.91% while stocks in Frankfurt and London rose 1.04% and 0.89% respectively.
This two day move really is a big reversal off last week’s lows and fears of an imminent withdrawal of stimulus. So Bernanke has done his job – interestingly though it would be reasonable to expect that if the Fed Chairman is confirming that he will goose stocks indefinitely we might have thought that gold would extend its rally. But what we saw overnight was a close back below $1600 oz with a fall of 1.44% to $1591. Silver was also lower dropping 1.3% to $28.88 oz.
Our usual indicators do however suggest that the gold rally may not be over and it would need to slip back down and through the bottom of the down trend channel – ideally at week’s end – to turn the outlook bearish again.
Crude was up 0.21%, copper fell 0.46% and the Ags were mixed with corn up 0.64%, wheat fell 0.39% and soybeans rose 0.55%. Cotton was on a tear up 3.32%.
Some interesting data out of South Korea today on Industrial production and sentiment so we will be watching that along with HIA new home sales, Private Capital Expenditure and Private Credit in Australia along with RBNZ Business confidence in New Zealand. Tonight German and Spanish unemployment rates will be interesting before the next read of US GDP, Chicago PMI and Kansas Fed manufacturing index.
Catch me on Twitter @gregorymckenna