Ben Bernanke would have looked at the US PPI data last night and been convinced he is doing the right thing. During November producer prices fell 0.8% from -0.2% last and -0.5% expected with the year on year rate now sitting at just 1.5%. Of course the Fed Chairman is expressly targeting unemployment now and will keep rates low until the rate falls to 6.5% but for mine the real target of his unconventional monetary policy is deflation.
Bernanke is a depression scholar and knows what has occurred in Japan for the past 20 years and he knows that weak aggregate demand equals weak pricing power which ultimately can or does lead to deflation.
Perhaps the markets know this too because the QE4 strength continued to fade overnight with US markets in the red from early trade following on from European stock markets which were weak from the get go as they caught up to the US reversal the previous day.
Now that the Fed is out of the way and now that we are approaching the second half of the month it is inevitable that markets in the US and by extension elsewhere must focus on the fiscal cliff discussions – or it seems lack thereof. Overnight John Boehner, the Republican House Speaker didn’t muck around when he said that the White House was willing to walk right up to the Cliff.
In a note yesterday to clients focussed on the same theme I had yesterday in the AUD Cross post yesterday that it is equities that will drive the Aussie dollar the Commonwealth Bank FX team made a compelling case for why stocks might actually fall into years end.
There is a risk that US equity markets underperform over the final weeks of 2012. Several factors may contribute to this possible weakness:
(a) Our analysis has found that 98 of the stocks in the S&P 500 are set to pay dividends (special or regular) between 19 and 31 December. The final batch of these stocks will begin to trade ex?dividend from 17 December. In total, the 98 stocks equate to 15% of the S&P 500 market capitalisation. The highest number and largest cumulative dividend payouts will occur on 21 and 28 December.
(b) US equity investors may look to lock in profits before year?end to benefit from the lower capital gains tax rates currently in place. In the year to date, the S&P 500 has risen by 13.6%. This type of year?end investor behaviour by investors is nothing new. Between 2000 and 2011, US equity markets tended to fall in the final week of December if the equity market performed strongly in the year.
(c) Since 2008, average daily trading volumes in the S&P 500 over the second half of December have been around 35% below the average between January and November. Reduced liquidity can exacerbate market moves. If the pressure in the final week of December is for the equity markets to move lower, then lower volumes could generate a larger downward spike.
(d) The current positive market expectations about the fiscal cliff may turn negative. At the time of writing there are 19 days for the US politicians to reach an agreement to avoid the full fiscal cliff. Heightened concerns about a possible US recession if no agreement looks in reach could weigh on global asset markets.
This is important to remember because while it would seem ludicrous to think that US politicians will let themselves go over the cliff don’t forget that the market funk back in 2008 after Lehman Brothers collapsed wasn’t really the collapse itself but the inability of lawmakers to pass Hank Paulson’s rescue bill the first time.
So there is a precedent and a huge one.
So as discussed above European stocks were under pressure from the get go and at the close the FTSE was off 0.27%, the DAX fell 0.43% but the CAC was off only 0.10%. Madrid and Milan did however have another better night closing up 0.43% and 0.64%.
In the US with 2 hours to go the S&P 500 is down 0.67%, the Dow is off 0.47% and the NASDAQ has dropped 0.74%
In Asia yesterday the Nikkei was on a tear as the competitiveness dividend of a materially weaker and weakening Yen helps stocks much higher with the index closing up 1.68%. The Kospi was also sharply higher after the BoK decision rising 1.38% while here in Australia the All Ords was essentially flat rising just 1 point at the close. Shanghai continued its erratic and volatile trade falling more than 1% but Hong Kong was less down beat falling just 0.26%.
Yesterday in the Morning Call I said that I thought the call of a run to 1.06 was valid but in the AUD Cross post where I focus directly on the AUDUSD, EURAUD, AUDJPY and the AUDNZD each day I made the point strongly that the AUD top was in and that if equities had turned lower then so to had the AUD.
So it was in the last 24 hours with the AUD following the futures and actual trade of the S&P 500.
As you can see in the chart above at 5.14 this morning as equities sold off so the AUD broke back under the trendline it broke up through – and which stretches back to the high in 2011 – and is now back at support around 1.0507. Below here it is 1.0489 and then if that gives way it is a reversal of the rally back to 1.0450.
The EUR too is constrained by an important trendline as you can see in the chart below. If stocks are going to go off or at least focus on the Cliff then it is to the US dollar that eyes will turn.
A break of 1.3037 would open the way lower and a break up through 1.3107 would turn the outlook more positive.
I like silver back in the $30 region and last nights move where it dropped more than 4% reinforces that reality to me (well its not really a reality until it comes to pass, but you know what I mean). Gold was off as well falling 1.3% back below $1700 trading at $1694 as I write at 6am EDT. Copper was also off 1.38% and crude fell 0.48%.