Tuesday, July 10, 2012

Gloomy economic and corporate data weighs on markets, currencies stabilise

Markets were under pressure in the past 24 hours as the Japanese Machinery orders tanked and the Chinese inflation data also spoke volumes about the underlying level of activity in China. This was compounded by European bond Markets waving more red flags with Italian and Spanish bonds once again under pressure and the latter closing back above 7% and the former pushing toward the top of their recent range as well. But the stronger economies of Europe are still able to access unbelievable market rates with France and Germany borrowing short term debt at a negative interest rate overnight. That's right, negative interest rates.
You don't invest at negative interest rates unless you are scared about something so coming on top of last week's gloomy economic data which included the weak non-farm payrolls and poor ISM and global PMI data last nights price action saw equity markets close mostly lower.
The issue for the market and pundits is of course that the economic outlook globally is deteriorating and as my colleague from Macro Investor, Delusional Economics, said yesterday this "economic downturn is rolling past Europe". Indeed Nouriel Roubini was channeling his inner DE overnight when he painted a very negative outlook for the global economy. A perfect storm if you will, saying that there were 4 factors combining to make 2013 possibly worse than 2008 when Bear Stearns, AIG and Lehman Brothers all collapsed.  Paraphrasing Roubini his 4 factors are:
  1. A stalling US economy
  2. The slow motion train wreck in Europe
  3. The slow down in economic activity slipping into the emerging markets and
  4. Military conflict in Iran and a spike in oil.
The first 3 seem highly probable but the 4th is unknowable until it happens, So the outlook is probably not as bad as Roubini suggests - until it is - if it is.
In Central Bank Land the fantasy continued with a number of senior policy makers talking to themselves and their colleagues as the intellectual battle over the outlook for Europe and the United States continues to abstract either the markets needs or those of the populace. Richmond Fed President Lacker reiterated his opposition to more stimulus while his colleague from the San Francisco Fed, John Williams, said if things dont go as expected then there would be room for more "accomodation". The key here is that the data must deteriorate materially before QE3 gets on the table meaning the Fed can slip and stay behind the curve as this US weak spot widens. In Europe Mario Draghi, ECB President, said the ECB is ready to do more if needed. Once again behind the curve and staying there.
So at the close of play the Dow Jones was 0.28% lower to 12,376, S&P 500 -0.16% to 1,352 and the NASDAQ off 0.19% to 2,931  the DAX down 0.35% to 6,387, the CAC down 0.38% to 3,156 and in the UK the FTSE was off 0.62%. Our SPI futures are flat which no doubt reflects that Asia was more bearish than Europe and the UK.
In commodity markets crude spiked higher on the back of the looming shut out in Norway closing up 1.12%. But there was more to the commodity markets than just the story about crude as pretty much every commodity I follow, 16 in all, were either flat or up. The CRB was up 4.88 pts to 291.80 and there was a continuation of the powerful rally that has been driving agricultural prices over the last little while. Lets hope that Australian Farmers can benefit from this.
Currencies stabilised over the past 24 hours largely driven by the EUR finding support near Friday's lows but equally because as the global macro market a lot of this stuff that share market types are getting to is already factored into FX markets. Sure the recovery in the EUR wasn't exactly stellar but then again the selling stopped just at a time when you might have expected EUR had nothing between 1.22 and 1.18. We'd characterise it as choppy and consolidative.

The Australian Dollar was also supported  by a pretty decent trendline and no doubt the solid push higer in commodity prices in the past 24 hours. Sterling and EuroYen were also better bid. I'm not overly bearish on the day as the charts suggest better price action ahead - that is USD weakness.
Lets have a look at some of the markets we follow using our AVAFX trading platform charts
EUR/USD: there is nothing really encouraging about the EUR's price action other than it rallied. One of my systems is still short but the other didn't get triggered because EUR didn't close below 1.2280 even though yesterday's low was 1.2255.

Longer term it seems biased toward 1.18 as noted yesterday but this bounce looks like it has further legs over the course of our day in Asia.
AUD/USD: The trend following system is still long and will cut out if the AUD falls below 1.0122. The AUD is not going lower unless or until the trendline from the recent low below 0.96 breaks. The AUD bounce off this line on the dailies and 4 hourlies last night so clearly traders are watching it.

GBP/USD: No big change from yestreday as GBP moves within its range. Sterling has bounced nicely from the 1.5460/85 region we identified as the last line of fibo support as the 61.8% retracement of the rally from the 1.5260ish low back in early June. The MACD is still negative on the dailies so while below 1.5580 I like it lower and a sign of a move back toward 1.5260 will be a move below 1.5460.

USD/JPY: Starting to break down through the uptrend line and I'd expect this to accelerate toward 79.20 in the first instanceover the next couple of days. This isn't a pair that is moving in the ranges of the other Majors so any trades will be slow burn.  

EUR/JPY: Like the EUR EUR/JPY found support yesteray and it too looks biased higher on the day in Asia toward 98.50 in the first instance perhaps even back toward 99.00 

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