This market is cheering global signs of extending and pretending from global governments and central banks. We know where it will all end, but the trouble is always figuring out how long the market wants to live in fantasy land.
Equity markets continue their ascent once again as the entire world now seems to be singing the interventionist tune. Besides the ECB’s operations and confidence they have apparently injected into the EU peripheral debt markets (witness today’s reasonably strong French and Spanish bond auctions), we’ve also had the news of a potential further boost to the IMF’s firepower and now increasing noise out of China on the potential for easing restrictions on bank capital requirements. So it’s fun in the sun for risk, which has learned so well not to fight the prospects of a global liquidity bonanza. Nevermind that the efforts of the public sector will only serve to prop up zombie banks (especially in Europe) and are all in the same old vein of extend-and-pretend. Nevermind that we’ve had a couple of rather ugly data points out of the US recently. Nevermind that any IMF funding would mostly come from countries that are neck deep in sovereign debt problems and that the US and Canada are unlikely to participate. And nevermind that corporate earnings reports in the US so far are off to their worst start in years (see article from Bloomberg Businessweek from yesterday). Long live liquidity and long live the printing press (says the market...)!
Shortly put, this mentality is the market driver at the moment, and will continue until it exhausts itself – whether that is today, tomorrow or not for a few weeks time. But like the moves in the wake of QE1 and QE2, this move will eventually fade as well, as all market rallies will, until the we begin to see authorities and the markets deal with the structural problems (solvency, not liquidity, as Steen rightly reminds us once again in his United States of Europe piece from today) . Until then, all market activity and speculation is a tiresome exercise of merely anticipating the authorities’ next move.
In that light, some of the move we are seeing could be pricing in QE3 from the US Federal Reserve as well. We’ll know more on that front next Wednesday after the conclusion of the FOMC meeting. In the light of that event’s import, it wouldn’t be a surprise to see a bit more caution cropping up in the days ahead.
Odds and ends
Aussie has maintained support against the USD despite a negative Australian employment report (internals showed weakness was in part time positions only, however) as global asset markets are supporting the Australian currency. The last three days have seen the AUD/USD fluctuating around the 200-day moving average just above 1.0400, a level that will have a hard time serving as resistance if global asset markets and key commodity markets continue to keep up a head of steam.
France and Spain managed to auction off almost EUR 15 billion of debt. Spain sold well over its target (EUR 6.6 billion vs. target of EUR 4.5 billion) in maturities from 4- to 10 years. France sold just short of its target, but unloaded a total of nearly EUR 8 billion. Interestingly, Spanish yields moved a bit higher on the day than did French yields and Italian yields actually fell.
The US data today was mixed. CPI was in-line with expectations and the core CPI remained at the highest level since 2008, though the month-on-month reading dipped as expected. The deceleration in the headline CPI put the year-on-year comparison at its lowest level in 9 months and favorable year-on-year comparisons that are likely from February could see these comparisons drop further. The weekly jobless claims number dropped very sharply, meaning that if we average it together with last week’s surprisingly high number, we get a reading of about 375k, very much in line with the “new norm” in claims from the weeks prior. The housing starts data was disappointing, but the dip comes in the context of a rising trend toward normalization.
Oil prices have rebounded again as an Iranian diplomat declared that a closing of the Hormuz straits . Consider the price of oil and consider a cross like NZDNOK, which last week reached a six-year high before finally reversing this week. The valuation there is extreme as Antipodean’s have been well bid on their Asian (non-European) exposure, AAA status and relatively fat yields. Having reached these kinds of levels, Aussie and Kiwi will likely prove the high beta currencies on the least whiff of trouble in asset markets going forward.
Chart: EUR/USD
Today sees EUR/USD trying to close above the 21-day moving average for the first time since November 1, as the sell-off was remarkably persistent until recently. If the pair maintain the rally stance in coming days, the round 1.300 level is the next obvious focus with the rapidly descending 55-day moving average the next area of interest (just under 1.3200 but falling fast.) To the downside, we’ve just broken up through minor local resistance at 1.2880, which now becomes support. So a dip into the close today back below this level (and therefore below the 21-day moving average, which is at about the same level) would cast a shadow over the prospects for this rally to extend.
EUR/USD" title="EUR/USD" width="641" height="494" />
Looking ahead
Watch out for the US Philadelphia Fed up shortly, which may confirm whether the strong Empire survey from earlier this week was a fluke or the real thing. To close the week tomorrow, we’ve got Canada’s CPI data for December (note that USD/CAD is challenging the final 1.0050/75 support zone ahead of parity and the 200-day moving average at around 0.9940.) and US existing home sales.
Markets go completely quiet in Asia after this week as the Chinese New Year festivities swing into full gear on January 23rd (Monday). Let’s see if this low volume, liquidity-driven market can manage to finish the week with a flourish or a fade. The enthusiasm for risk beggars belief. Interesting that the super-heroes of the latest positive move in risk, the Aussie and Kiwi, have faded over the last couple of days against the market’s former weaklings like EUR and GBP. A blip or a sign of a top for now?
Equity markets continue their ascent once again as the entire world now seems to be singing the interventionist tune. Besides the ECB’s operations and confidence they have apparently injected into the EU peripheral debt markets (witness today’s reasonably strong French and Spanish bond auctions), we’ve also had the news of a potential further boost to the IMF’s firepower and now increasing noise out of China on the potential for easing restrictions on bank capital requirements. So it’s fun in the sun for risk, which has learned so well not to fight the prospects of a global liquidity bonanza. Nevermind that the efforts of the public sector will only serve to prop up zombie banks (especially in Europe) and are all in the same old vein of extend-and-pretend. Nevermind that we’ve had a couple of rather ugly data points out of the US recently. Nevermind that any IMF funding would mostly come from countries that are neck deep in sovereign debt problems and that the US and Canada are unlikely to participate. And nevermind that corporate earnings reports in the US so far are off to their worst start in years (see article from Bloomberg Businessweek from yesterday). Long live liquidity and long live the printing press (says the market...)!
Shortly put, this mentality is the market driver at the moment, and will continue until it exhausts itself – whether that is today, tomorrow or not for a few weeks time. But like the moves in the wake of QE1 and QE2, this move will eventually fade as well, as all market rallies will, until the we begin to see authorities and the markets deal with the structural problems (solvency, not liquidity, as Steen rightly reminds us once again in his United States of Europe piece from today) . Until then, all market activity and speculation is a tiresome exercise of merely anticipating the authorities’ next move.
In that light, some of the move we are seeing could be pricing in QE3 from the US Federal Reserve as well. We’ll know more on that front next Wednesday after the conclusion of the FOMC meeting. In the light of that event’s import, it wouldn’t be a surprise to see a bit more caution cropping up in the days ahead.
Odds and ends
Aussie has maintained support against the USD despite a negative Australian employment report (internals showed weakness was in part time positions only, however) as global asset markets are supporting the Australian currency. The last three days have seen the AUD/USD fluctuating around the 200-day moving average just above 1.0400, a level that will have a hard time serving as resistance if global asset markets and key commodity markets continue to keep up a head of steam.
France and Spain managed to auction off almost EUR 15 billion of debt. Spain sold well over its target (EUR 6.6 billion vs. target of EUR 4.5 billion) in maturities from 4- to 10 years. France sold just short of its target, but unloaded a total of nearly EUR 8 billion. Interestingly, Spanish yields moved a bit higher on the day than did French yields and Italian yields actually fell.
The US data today was mixed. CPI was in-line with expectations and the core CPI remained at the highest level since 2008, though the month-on-month reading dipped as expected. The deceleration in the headline CPI put the year-on-year comparison at its lowest level in 9 months and favorable year-on-year comparisons that are likely from February could see these comparisons drop further. The weekly jobless claims number dropped very sharply, meaning that if we average it together with last week’s surprisingly high number, we get a reading of about 375k, very much in line with the “new norm” in claims from the weeks prior. The housing starts data was disappointing, but the dip comes in the context of a rising trend toward normalization.
Oil prices have rebounded again as an Iranian diplomat declared that a closing of the Hormuz straits . Consider the price of oil and consider a cross like NZDNOK, which last week reached a six-year high before finally reversing this week. The valuation there is extreme as Antipodean’s have been well bid on their Asian (non-European) exposure, AAA status and relatively fat yields. Having reached these kinds of levels, Aussie and Kiwi will likely prove the high beta currencies on the least whiff of trouble in asset markets going forward.
Chart: EUR/USD
Today sees EUR/USD trying to close above the 21-day moving average for the first time since November 1, as the sell-off was remarkably persistent until recently. If the pair maintain the rally stance in coming days, the round 1.300 level is the next obvious focus with the rapidly descending 55-day moving average the next area of interest (just under 1.3200 but falling fast.) To the downside, we’ve just broken up through minor local resistance at 1.2880, which now becomes support. So a dip into the close today back below this level (and therefore below the 21-day moving average, which is at about the same level) would cast a shadow over the prospects for this rally to extend.
EUR/USD" title="EUR/USD" width="641" height="494" />Looking ahead
Watch out for the US Philadelphia Fed up shortly, which may confirm whether the strong Empire survey from earlier this week was a fluke or the real thing. To close the week tomorrow, we’ve got Canada’s CPI data for December (note that USD/CAD is challenging the final 1.0050/75 support zone ahead of parity and the 200-day moving average at around 0.9940.) and US existing home sales.
Markets go completely quiet in Asia after this week as the Chinese New Year festivities swing into full gear on January 23rd (Monday). Let’s see if this low volume, liquidity-driven market can manage to finish the week with a flourish or a fade. The enthusiasm for risk beggars belief. Interesting that the super-heroes of the latest positive move in risk, the Aussie and Kiwi, have faded over the last couple of days against the market’s former weaklings like EUR and GBP. A blip or a sign of a top for now?