The US Dollar continued to sweep the field on Friday night sweeping the Euro and Pound to new multi week lows. Gold and crude fell as well and the Aussie dollar was under pressure. Stocks in Europe fell again but the better US data lifted stocks from their lows even if they did end up finishing in the red.
The Markit PMI data for Italy, France, UK, Greece and Eurozone were all still under the 50 contraction zone with Italy in particular actually going backwards from last months 47.8 to print 45.8. Showing the growing chasm in the EU was the German PMI which printed at 50.3 up from last months 49.8. This chart by Markit that we picked up via Business Insider says it all about the growing tensions that will emerge in Europe and the folly of those in the political class who think the Euro crisis is behind them.
Adding to the tension that is simmering in the background is Italy which isn’t going away in a hurry although the markets are continuing to focus more on Bernanke’s reiteration, 3 times, last week that the Fed is not predisposed to withdraw stimulus anytime soon. Over the weekend emerging Italian political leader Beppe Grillo said in an interview with a German Magazine, Focus, that
“if conditions do not change” Italy “will want” to leave the euro and return to the Lire.
He also said that Italy needs to renegotiate its debt
“Right now we are being crushed, not by the euro, but by our debt. When the interest payments reach €100 billion a year, we’re dead. There’s no alternative,” he told Focus, a weekly news magazine.
“In six months, we will no longer be able to pay pensions and the wages of public employees.”
Which brings us to the Euro which is finding some support from the old trendline that represented the March 2012 to September 2012 trendline and also coincides with our slow moving average on the weekly charts.
Euro looks to be headed back toward 1.2650ish but has some solid support at 1.2710/20 on the way as well as the 200 day moving average at 1.2830 today. A close below 1.2994 will open the way lower although as we saw Friday night where the low was 1.2966 just trading through this level may not be enough.
The Pound was also under acute pressure again Friday as the outlook for the economy just goes from bad to worse to terrible to gee whiz I’ve run out of hyperboles. The Markit manufacturing PMI crashed from 50.5 last time to 47.9 this month and was a shocker against the 51 the Punditry expected. Mortgage approvals were also substantially lower and the selling was ignited once again. Sterling last traded at 1.5046 (or was at least quoted there) this morning and we continue to focus on a move to 1.42ish after Sterling tried to rally last week but was rebuffed at the break down level of the past few weeks. Any strength in the USDGBP rate is going to have to flow from the USD side of the cross.
The Aussie dollar is also under pressure and while its weakness is not as acute as either the Pound or the Euro’s potential it seems the market is falling out of a little love with it. We thing 1.01 is in the frame this week and that this is a critical juncture with a break signalling a deeper retracement.
1.0091/95 is the key level to watch and likely pretty good support will be found in that zone.
Looking forward to this week data out of China over the weekend was a little disappointing with the non-manufacturing PMI released yesterday dropping from 56.2 to 54.5 in February. This together with some new curbs on property speculation that the Chinese authorities put in place on Friday night (HT ANZ Chief Economist Lui Li Gang) is just another indication that the global recovery seems to be faltering a little as we saw in last weeks PMI’s in Europe and China.
Non-farm payrolls is out at the end of this week and much water can flow under the bridge before we get there but it will be a very important outcome for the markets. A little too hot growth in jobs and the markets might worry about the Fed again but a little too weak growth in jobs and it will undermine the nascent recovery in the US economy.
One thing we picked up over the weekend which is worth thinking about in the context of the equity markets rally and the sustainability of same was Fed Chairman Bernanke’s speech on Friday about long term interest rates. In the speech Bernanke reiterated why rates where low and what it suggested about the future path of interest rates. Perhaps we are cherry picking here but in his discussion was a clear warning to the stock market,
The fact that market yields currently incorporate an expectation of very low short-term real interest rates over the next 10 years suggests that market participants anticipate persistently slow growth and, consequently, low real returns to investment. In other words, the low level of expected real short rates may reflect not only investor expectations for a slow cyclical recovery but also some downgrading of longer-term growth prospects
Markets don’t care about that at the moment being goosed by Fed policy but it is an undeniable fact that the current environment requires some pretty hefty innovation and productivity improvements to justify prices just a hair away from all time highs.
On Friday night as we noted above the early European indices weakness gave way in the US to the better than expected ISM Manufacturing PMI which printed 54.2 v 52.5 expected and 53.1 last. This together with the Michigan consumer sentiment dragges US equities out of the doldrums.
At the close the Dow was up 36 points or 0.25%, the Nasdaq up 0.31% and the S&P rose 0.22% to 1518. In Europe it was red across the Continental board with the FTSE somehow the only market to rally up 0.29%. The Dax fell 0.44%, the CAC dropped 0.62%, Spanish stocks fell 0.53% and the FTSEMIB in Milan dropped 1.55%.
Looking at the chart of the S&P 500 we reckon this is still a topping pattern and while it may still make a marginal new high we see it chart wise as going sideways for a while.
On commodity markets Nymex crude fell another 1.49% to $91.02 Bbl. Gold dipped 0.37 and closed right on support at $1575 oz. Silver was up 0.2% to $28.52 but Dr Copper dropped 1.30%.
In Australia today we get the TD inflation data . ANZ Job ads, Building Permits and Q4 Company gross operating profits. Tonight we get Portugeuse unemployment, UK Construction PMI, New York ISM and Fed Vice-Chair Janet Yellen will be giving a speech likely to reinforce the Fed will stay the path.