Markets are strange creatures and even though US non-farm payrolls on Friday night exceeded pundits expectations of 125,000 with an increase of 171,000 in October US stocks closed lower having been in the red for most of the day. Crude oil and Gold also were sharply lower as the US dollar’s strength reinforced the selling pressure on them and in turn on US equities tied to energy.
After the week that markets had and in the run up to the Presidential Election on Tuesday and with the Fiscal cliff looming for the US it is hardly surprising that traders found the cloud amongst the bluish sky rather than the silver lining of the jobs report.
Over the weekend there was a G20 meeting in Mexico, with Reuters reporting this morning that the draft communique would highlight the risks to growth,
“Global growth remains modest and risks remain elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the United States and Japan, weaker growth in some emerging markets and additional supply shocks in some commodity markets,” the draft said, according to the source.
Usually the 4th quarter of a Presidential Election year can be a good solid one for stocks but with all the global headwinds and with stocks still up at quite heady territory given the economic backdrop the chances are that 2012 is one of those exceptions to the rule.
The good news for trading though is that at worst we’ll get a range to trade and more likely we’ll get some trend changes to hitchhike onto.
At the closing bell the S&P 500 was down 13.39 pts or 0.94% to 1414. Interestingly the recent uptrend line that the S&P broke lower through was retested and rejected in early morning trade before the push lower. The Dow dropped 139 points or 1.05% and the NASDAQ fell 1.26%. This week’s election could mess trading up a bit but once it is out of the way with fiscal cliff will come sharply into focus.
In Europe the FTSE was up 0.11%, the DAX barely changed up 0.01% while the CAC fell 0.13%.
In Australia our SPI200 contract reversed the bounce off support the previous day and closed over the weekend just above the important support at 4425 we are watching. The Australian stock market is likely to head lower if this level gives way.
There is a set up forming that could lead to a huge US dollar rally coming through and reinforcing the recent and current emerging trends in assets like crude and gold.US data has been much better recently than expected – thus the US dollar gains support. In contrast the Euro zone data has been a little worse as has Australian data and Japanese data.
So the US dollar is showing some inherent strength given the better data performance and then if you get a stock market that has a mild downside bias you get further reinforcement of the US dollar strength coming from safe haven bids and this USD strength then puts downward pressure on commodities denominated in US dollars which then leads to pressure in the stock market for energy producers and the cycle starts again. So even with the fiscal cliff looming – we could be at the start of a US Dollar rally.
At the close on Saturday morning reflecting the above the Euro was looking very weak sitting just on the 200 day moving average at 1.2830ish. The reversal off the high of 1.2950 to the low 1.2820 Friday night was quite telling and my medium term trend indicator has now turned down for the Euro. Of course the 1.2800 level remains the range bottom for now and 1.2808 has been the low so far this morning but a move below 1.2785 could signal a big turn.
The US dollar hit a 6 month high against the Yen at 80.66 but it has pulled back in trade this morning. Importantly CFTC Commitment of traders data shows that Yen traders have increased their short position this week to -37, 020. In the context of the last 6 months that is in the top quartile of positioning short for the Yen but we think this reflects the overall price action of the USDJPY. There is room for more shorts but any positioning above -60,000 contracts would take short positions to multi year highs and flag a warning for a reversal.
In other Currencies the GBPUSD looks terrible on the candlesticks after the reversal of Thursday’s rally. This has tempered the fall in EURGBP although it is sliding outside the 4 month uptrend.
For the Australian dollar USD strength and a sell off in equities combined to knock it off its pedestal for a bit. The high of 1.0418 was inside the level that I identified as a break higher so no longs were instituted thankfully and the Aussie reversed to a low of 1.0330 on Friday night and it sits around 1.0338 this morning. Support is at 1.0295/98 this morning.
Gold and crude both fell on Friday night buffetted by the US dollars strength. Gold fell $40 oz or 2.33% to $1677 and even though I am bearish longer term and my medium term system has been short for a couple of weeks it remains within the uptrend. Support is the 200 day moving average at $1662 and then trendlines at $1633 and $1620. SIlver was also pressured falling 4.32%.
Crude fell 2.56% to $84.79 Bbl and I’m watching $84.42 as a key level for a deeper pullback. The Ags were all lower as well with Corn down 1.53%, Wheat dropped 0.46% and Soybeans were off 2.02%
Datawise It is a big week for Australia with the RBA meeting tomorrow and we kick off today with the AiG Performance of Services index and the TD Inflation data before ANZ Job Ads, Retail Sales and the September trade balance. In China today we have the HSBC China Services PMI and In the US tonight ISM non-manufacturing PMI.
Thoughts, comments, queries together with frank and fearless feedback all welcome. I’m happy to answer questions or comments on the comment stream wherever I can
NB: Please note all references to rates above are approximate and should not be used for trade reference.