Wall St. extends rally:
Between upside surprises with Pending Home Sales and Construction Spending, a further breakdown of the USD Index, and rising spot crude, both the S&P 500 and Dow couldn’t do anything but extended their rally, turning key resistance levels into new support levels. Everything was working in Wall St.’s favor today, especially the USD Index in addition to Treasuries remaining strongly bearish. At one point the 10-year yield went as high as 3.20% before backing off to 3.17%.
Pending Home Sales showed a month-over-month gain of 3.2% and a year-over-year gain of 1.1%. Digging through the data, Pending Home Sales were not up across the board, in fact, it was the South and West that carried the data into positive territory. Pending Homes Sales in the North were down 5.7% and in the Midwest they were down 1.0% while in the South they were up 8.5% and in the West they were up 3.9%. So at this point I’m not seeing a true bottom in housing, not at least until the contraction in Pending Home Sales stops across the board, having the South and West carry the whole country is no sign of true recovery, especially in light of those areas having the highest foreclosures in the country.
Obama tax plan to spook markets?
Nope, I don’t think. Despite Obama’s strong rhetoric against tax havens and tax-evaders, like his own Treasury Secretary, I think Obama is more bark than bite on this tax issue. Even his announcement of hiring an additional 800 new IRS agents isn’t going to scare anybody like it normally would. First of all, Obama’s tax plan will be met with a lot of resistance in congress and could be tied up in the legislative process for awhile. Plus, the new tax rules wouldn’t go into effect until at least 2011 and that’s just too far into the future for Wall St. to freak over, it’s hardly a “flavor of the week” issue and I doubt it’s anything market participants will stress over right now.
At this point Wall St. shows zero signs of slowing down. We still have a few weeks before we hit true summer session trading conditions when liquidity dries up. Yesterday and last week I gave the list of correlated markets that would contribute to Wall St. extending their rally, if you missed those, you can read them here and here. Those are the core underlying fundamentals that support equities, so if you’re looking for clues and signs when the S&P 500 may pullback, the correlated markets on that list will light the way.
Eurozone fundamentals point to ECB rate cut this week:
If there was any doubt whether or not the ECB will cut rates on Thursday, I believe the latest German Retail Sales and employment data should pretty much seal the deal. Market economists were expecting a German Retail Sales gain of between 0.1% and 0.2% but we got a -1.0% print which is the 11th straight month-over-month decline. Obviously consumers don’t buy when they don’t have jobs and German unemployment has risen for 6 straight months, pushing the German Unemployment Rate to 8.3%. This puts the German economy on pace to lose over 50K jobs a month through 2009.
Some of the latest ECB comments also point to a Thursday rate cut. ECB all-star Jean-Claude Juncker said:
“Can’t say if economy has reached bottom; Eurozone economy has not stabilized”
It should be noted Juncker has also made comments against adding new economic stimulus and the so-called ‘non-standard measures’. ECB Papademos was even more vocal on where he stands with rate cuts and inflation:
“Uncertainty around outlook unusually high; ECB rate cuts will help economic recovery; inflation pressures have diminished and there are no imminent inflation risks”
And we got even more rhetoric out of the European Commission this morning saying the Eurozone economy will contract by 4% in 2009. Just a month earlier they said it would only contract by 2% in 2009. They expect unemployment to hit 11.5% by 2010 and the Eurozone’s budget deficit to double the limit set by the European Commission. As soon as this new data was released, ECB Almunia was quick to put any deflation fears to rest, saying:
“Doesn’t see a serious risk for deflation in the EU or in the euro area”
What does it all mean? I think it means we get a 25bps rate cut on Thursday and a decent probability to see the so-called ‘non-standard measures’ revealed to the markets. The past few days a lot of the rhetoric out of the ECB have been assuring market participants that deflation or disinflation is not an issue, even though a lot of the CPI and PPI says otherwise. Deflationary fears are not anything the ECB wants to deal with on top of everything else, so we may see our last of the ECB rate cuts on Thursday and that would be more of a bullish sign for the euro. We’ll cover the upcoming ECB rate event in Wednesday’s update.
Tuesday trading:
Right now, Wall St. is the center of the universe and will remain as such for the time being. That means all markets will take their cue from the S&P 500, and for us FX traders, it means respecting the market correlated variables. No matter which pair we trade, as long as the S&P 500 goes up and the USD Index goes down, risk will come off the sidelines sending the EUR, GBP, AUD, CAD, and CHF higher, while the USD and JPY goes lower and remains under pressure.
Even after repeating this stuff over and over like a broken record, I still get emails asking me why the euro is so strong, so let me repeat it all again…
I don’t care what any chart, tech indicator, or market analyst has to say, as long as the S&P 500 and crude keep tag teaming the USD Index as they’ve been, trying to short against higher risk, higher yielding markets is an exercise in futility. Crude rose to its highest level in 2009, the S&P 500 wiped out its 2009 losses after gaining over 3% today, the euro rose over 1% vs. the dollar, and the USD Index crumbled, falling from 84.80 to test the 83.80 level…
Everything is working against the dollar, so if you wan’t to trade stress-free, either don’t buy the dollar or don’t trade. Sell the dollar until its market correlated variables tell you otherwise or just sit on the sidelines. It doesn’t matter if it makes no sense for the euro, pound, Swiss, and Aussie to gain, they have to based on what’s happening on Wall St. It cannot go any other way until money-flows come back out of equities.
Although volumes are lighter in equities, the conviction buying sustains. So the question is, what would signal equities to come lower, thus boosting the USD Index, which would send the EUR, GBP, AUD, CAD, and CHF lower? Three things:
- Lack of buying conviction
- Profit-taking
- A geo-political event that causes risk aversion
It takes buying to drive prices up, to make them go higher, but it does not necessarily take selling to send prices lower. One of the biggest contributing factors in terms of how price action works to take prices lower is simply for lack of buying and not necessarily heavy short-selling. If you remember back to February and early March, not only was there a complete lack of buying on the S&P 500, but there was also heavy conviction selling, as evidenced through equities volumes levels, they told the tale. So, in that scenario two contributing price action factors sent prices down to their extremes.
Now we have a scenario where the conviction is on the buying, those who were heavily short at the beginning of March continue to be squeezed, plus, the bulls aren’t taking any profit off the table like they used to at the start of the rally. There’s a lot of confidence on Wall St., so until the conviction buying slows, the profit-taking begins, or we get a geo-political situation that causes risk aversion, it’s all going up and not worth fighting against.
I’m not smart enough or know enough or have been around long enough to predict when the S&P 500 will stop rising or take a turn, so until then, my own personal trade plan is to simply go with the flow and not fight any battles I know I cannot win.
Tuesday fundamentals–
At 1230 EST the RBA will announce their interest rate and latest monetary policy statement. I’m not expecting a rate cut from the RBA this month, but should they cut rates, this would be a shock to the markets, and I would expect to see the AUD come lower. The other key is what the RBA has to say about Australia’s future economic outlook. This interest rate event should cause some movement across the board in FX, especially if we get any surprises.
At 1000 EST we get Bernanke’s testimony and ISM Services. Bernanke will testify before the Joint Economic Committee in DC and I would expect a few heated and tense moments, especially when Ron Paul gets his 5-minutes to destroy the Fed’s credibility as he does so well. In my view, Bernanke will paint a brighter picture of the economy, signal future growth potentials, low inflation, easing of credit conditions, and the potential for the US economy to grow in 2010. I really don’t see Bernanke saying anything to put Wall St.’s rally at risk but he may get hammered by politicians on the weaker dollar and the bailouts.
Don’t forget Tokyo is closed tonight for a holiday, but London will be back on Tuesday and there’s a good chance our friends in London will want to pile into the equities rally and make up for what they missed today. So here again, I like the USD and JPY to stay under pressure and go lower, while the higher yielding currencies continue to find support with the help of the S&P 500, Dow, crude, and continued weakness on the USD Index. That’s how I see it and that’s how I’m trading it until those core underlying fundamentals show me otherwise.
EUR/USD key levels will be posted in the morning and as always, be smart with your risk and money management.
-David
