We have some appetizers up today with US ADP payrolls and the Bank of Canada.. Equity markets are pushing historic levels, but the heart of the week starts tomorrow with the BoE/ECB, and then finishes with the US employment report Friday.
The big news yesterday, of course, was the iconic Dow Jones Industrial Average closing at all time record highs above 14,200, just pulling above its high from October of 2007. The broader S&P 500 index is a little over 2% off its all-time highs as well. Today, we have the DAX exploding through resistance to trade at its highest level since 2007.
It is clear that the Fed (and BoJ) policy of printing money continues to buoy asset markets and could well continue to do so as long as Bernanke himself fails to signal any change in policy – but I remain firmly grounded in the belief that this is a game of liquidity chasing that “will end very badly” as Stanley Druckenmiller, Soros’ legendary trader for many years, has been out saying recently. The market has managed to climb the wall of worry and the evidence that John Hussman, of Hussman Funds fame, has presented for months on end that suggest there is no historical precedent for the market performing well from here. Conditions are the same as those that coincided with massive market tops in the past, that soon led to major bear markets.
So how much longer with the current market paradigm? It’s dangerous to guess but, my best guess at the moment is that we could continue like this for another couple of weeks to a couple of months at the most. If we are to use the model of the last three years in a row, then the rally may dry up in the April to May time frame – or a bit earlier if too many investors try to play this seasonal pattern.
If we are at unsustainable levels in risk, then every tick higher makes the subsequent fallout that much more jarring. The most interesting scenario is if this ends because the Fed is finally forced to come out and put on the rhetorical breaks, and a massive bout of market volatility is triggered just as the nomination process for the new Fed chairman/reappointment of Bernanke arrives this summer. (The word is supposedly that Bernanke is not interested in seeking re-nomination.)
Looking ahead
Focus will be on the ADP payrolls announcement at 13:15 later, though we all know this does a spotty job of predicting Friday’s official payroll numbers – or the mysteries of the US unemployment rate.
The Bank of Canada is up later today. Carney and company have been backing off the rate hike rhetoric, and this has pushed Canadian rates at the low end of the curve much lower lately, making the CAD weaker. Barring any dovish surprises and if the USD continues to consolidate here while we see a strong Ivey PMI (out at same time as BoC decision), we may see better entry levels for CAD bears. The USD/CAD pair has been rather calm after its big move through 1.0100 resistance and after the 1.0300 level was rejected recently, the risk in the structural technical picture looks skewed to the upside for the pair.
Tomorrow we have the BoE and the ECB on tap. To me, the die was already cast for the pound when it failed to consolidate more strongly versus the Euro during the recent post-Italian election turmoil. The BoE is most likely to remain silent tomorrow – does that finally trigger a bit of a squeeze on pound shorts? If so, it will likely merely represent fresh opportunities to sell the GBP/USD pair if it gets up against the resistance provided by the old range in the 1.5250+ area and maybe even buy EUR/GBP, although I prefer the former. The risk for GBP bears is that the currency just continues to melt under the relentless and stark fundamentals against the currency’s favour. Still, I suspect that the pound’s weakness is having more of an impact on the BoE’s decision making than others perhaps do.
The ECB is a tougher read – but I'll be savvier tomorrow. All is quiet on the sovereign spread front, with Spanish yields declining back to 5.00% again after hitting 5.50% last week on the Italian election results. Italian yields are also at their lowest level since, although still elevated. What new can the ECB bring to the table besides a rate cut? Draghi’s main job will be to appear confident and in control. The Euro looks surprisingly resilient in light of the news - the EUR/CHF looks particularly interesting here, having broken above the 1.2275 area more firmly in today’s trade. Tomorrow’s ECB gives us the confirmation or rejection of that development.
Finally, I’m keeping my eye out on the AUD/USD. The chart is showing us a smart reversal, but I remain skeptical and will be interested to see how the week closes. If the pair can’t maintain above the 1.0200/25 area into Friday’s close, the bears may yet nourish fresh hopes.
Stay careful out there.
Economic Data Highlights
- UK Feb. BRC Shop Price Index rose +1.1% YoY vs. +0.6% in Jan.
- Australia Q4 GDP rose +0.6% QoQ and +3.1% YoY vs. +0.6%/+3.1% expected, respectively and vs. +3.1% YoY in Q3.
- UK BoE’s King and Bailey to speak before parliament (0945)
- Euro Zone Q4 GDP (1000)
- US Feb. ADP Employment Change (1315)
- US Fed’s Plosser to Speak (1315)
- Canada Bank of Canada Rate Decision (1500)
- Canada Feb. Ivey PMI (1500)
- US Weekly Crude Oil and Product Inventories (1530)
- US Fed’s Beige Book (1900)
- Australia Feb. AiG Performance of Construction Index (2230)
- New Zealand Feb. QV House Prices (2300)
- Australia Jan. Trade Balance (0030)