Vantage FX | With the S&P above 1600 and the Aussie atop 1.03 markets are loving risk | 6 May 2013

May 6, 2013

This rally is relentless and Friday night’s better than expected non-farm payrolls drove the S&P through 1600, propelled the Dow through 15,000 for a time and kicked Dr Copper 6% higher.

In the words of the great market trading gurus of the past – DON’T, DO NOT, FIGHT THE TAPE

Surely this is going to be the meme of the week. Surely risk is going to be on in Asia today and in markets this week. Perhaps even the idea that we can sell in May and come back in 3, 4 , 5 or even 6 months is out this year given there has been so much talk about it recently and the S&P 500 has so decisively rejected and bounced off the important 1520 support zone.

If the history of the QE world tells us anything it is that the Bull Market grinds on relentless like the “little engine that could” but that the Bears need feeding – they need bad news to overwhelm the central banks goosing of stocks, they need bad news to overwhelm the free money and almost infinite discounting of the cash flows associated with stocks and they need bad news to feed their strength.

Initially the reporting season was looking weak but now we’d say it looks about average. Initially the Cypriot issue was a problem but it has recededed into the back and initially it looked like weak data might derail the bulls and feed the bears but a ECB cut, Japanese Stimulus and the Fed signalling last week that it is looking equally at scaling up purchases in its QE program as scaling down has put a floor under stocks and pushed the sellers to the sidelines unless or until a grey or black swan pops up to feed the bears.

Rhetorically and economically the price action of the markets doesn’t really seem right given the underlying structural weakness in the global economic system but rhetoric will see you go broke. Price action and the study and following of it is what this website and these reports are all about and as the stock market in the US makes new highs, as the Aussie Dollar bounces of 1.0219 again and as Dr Copper bounces 6.73% in US trade we have to respect this price action.

Is it the dawn of another golden age for stocks? We don’t know but as you can see in the monthly chart below the S&P 500 has broken up through both the recent high and the long term trend for the tops of the 2000 and 2007 peaks. So for the moment the US stocks are the little engine that can.

Monthly, Weekly and Daily trend indicators remain robustly in a bull trend.

Turning to the catalyst for all this positivity – the non-farm payrolls printed 165,000 versus the expectations of 145,000 but the real kicker was the positive revisions to the previous months data which saw March revised up to 138,000 from 88,000, and February increased to 332,000 from 268,000 painting a different picture of where employment in the US is currently at but not threatening a Fed reversal.

So at the close the Dow was up 142 points or 0.96% to 14974 after a brief foray above 15,000 earlier in the day. The Nasdaq was 1.15% high as the tech stocks really take a leadership role in this rally and the S&P 500 had another new all time high and all time high close trading to 1618 and 1614. In Europe the FTSE was 0.93% higher, the DAX surged 2.01%, the CAC rose 1.41% while stocks in Milan rose 1.04% and in Madrid stocks were up 1.65%.

Importantly for those of us who think that Europe can not austerity its way to growth the French Finance Minister Pierre Moscovici said over the weekend (Source Bloomberg)

“We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said today on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”

Portugal went the other way last week but while this is likely a good sign for France if they can figure a way through it highlights a rift in the Franco-German compact that has held the Euro project together for so many decades.

Now to Global FX markets and we see there were a few significant moves last week.

The Aussie held the very important 1.0219 level again over the weekend which saw it close above the big weekly uptrend and support the recent low once again. It reinforces the 1.0150/1.06 range the Aussie has been in for months now. Interesting as we highlight in our look at the hedge fund and CTA traders positioning in FX markets later this morning you’ll see that Aussie longs didn’t budge last week suggesting it is a break below 1.02 that is important.

As you can see in the weekly Aussie Dollar chart above there is little momentum in the AUDUSD at the moment as it remains in a 12 month box. On the dailies the price action is equally tortured and while the bounce off 1.0220 was and is strong the big hurdle for the Aussie this week is the RBA meeting tomorrow – will they cut rates? It’s hard to tell and the majority of pundits still think they are about a month away so as long as they are not uber bearish on the outlook in their statement the Aussie may get a lift from the RBA holding fire this month.

If they don’t however the big question is going to be can the Aussie withstand another cut and we’d argue the medium term answer is no given that besides overall global positive risk appetite the positives for the Aussie are souring.

The Euro benefitted from a generally more positive risk environment on Friday rallying to be at 1.3113 this morning but still trapped in its 1.30/32 box. USDJPY rallied as well back above 99 on Friday’s New York close and this morning’s early Asian trade. Importantly for all traders who have a fundamental bent to note is that after 6-8 weeks were the data was universally undershooting expectations at an increasing rate last week’s data showed an improvement and the Citibank Economic Surprise index for the US even managed to claw it’s way out of negative territory – only just but still out of negative territory which is another positive underpinning for risk.

GBP remains in a positive uptrend and may be on its way to 1.57 and USDCAD looks biased back toward parity to test its long term uptrend.

On Commodity markets as we noted Dr Copper rallied strongly and Crude was up 1.72% to $95.61. Gold is at $1470 and Silver continues its volatile trade and is back above $24 ounce.

Data

It is a fairly quiet week for the US but in Australia we have a raft of data which includes TD Inflation this morning, RBA tomorrow and employment later this week. Could the RBA wait to see the employment data and then move in June? Probably there is never a rush to ease or tighten when monetary policy has such long lag time so we are guessing they may leave things as they are this month and then move after the budget.

In Europe tonight it is Markit Services PMI everywhere as well as Eurozone retail sales.

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