Snapback – Markets bounce but is it sustainable

September 28, 2011

Australian Equities, FOREX, Global Macro

The bipolar nature of markets is hard to fathom at present, although we have a go below. Overnight we saw the Dow up 1.33% and the S&P 500 up 1.07% but they were off their highs for the day. In Europe it was a stellar night with the DAX up 5.29%, the CAC up 5.74% and the recently more docile FTSE even up 4%. Hope springs eternal I guess.

 In Australia the ASX 200 had its best rally in 3 years – not that that means anything in a market that has essentially  gone nowhere in this time frame. Indeed the ASX200 is roughly where it was in July 2009 and May 2005 as the chart below shows.

In Commodity markets the price of crude rose 5.25% in the US but a more subdued 3% in Europe. Copper was up 4.77% and markets are thinking of copper once again as the prescient metal – Dr Copper if you like because it is used in some much “stuff” that it is seen as a global bellwether of growth. Personally I reckon it’s just noise, volatility and trading like so many other markets at the moment.

In currency land the Aussie Battler battled back from the brink Monday afternoon but pulled up at important short-term resistance in the 0.9965/95 region. It seems it came off its highs with US equities and sits at 0.9906 as I write.

It seems that the catalyst for the US equities fade late in the day was a bit of bad news from Greece (HT Zero Hedge) as the FT reports that the “rally ebbs on fears of eurozone discord” with the FT running the banner headline that “Split opens over Greek bail-out terms” No, really? European politicians can’t agree on something? I don’t believe it. The FT says as many as 7 of the 17 EU members want private creditors to lose more in a Greek bailout/default.  It also seems that Athens may have bigger funding troubles than were thought two months ago according to the FT. And that’s a surprise?

Anyway as we mentioned yesterday i thought that a lot of technical levels had been satisfied with Monday’s pessimistic crescendo – the implication was we were going to get a bounce. Indeed amidst the carnage of an AUD/USD rate of 0.9633 and gold down at USD 1533 per around the office Monday afternoon we had discussed whether it was a classic Monday afternoon Asian session head fake.  We thought it probably was but even a head fake in Asian trade doesn’t usually see the sort of snap back that we have had in the past 36 hours.

So what’s going on?

The answer is in my view trading and technicals.

The newswires are running the story this morning that it is the hope of a European bailout of Greece and the leveraging of the EFSF along with an ECB cut of 50 bps that has been buoying the market but we have consistently, in the past day and a half, seen denials from politicians and central bankers that this is going to occur.

From the Wall Street Journal Brussels Blog on the EFSF leverage a couple of hours ago,

“Some of the proposals for leveraging the EFSF would potentially imperil the top credit ratings of France, and even Germany. Beyond that, the bottom line for these proposals is that most are subject to serious structural flaws, which suggest they will never see the light of day.”

On the ECB Reuters reported at 5am this morning that,

“Luxembourg’s ECB policymaker Yves Mersch warned on Sunday that speculation of a sharp interest rate move next month was “wild,” although he noted that there was room for manoeuvre if the economy worsens significantly from current levels.”

Yet markets are rallying as if all the ills have been cured and it is onwards and upwards.

How can that be?

The answer is really simple – more buyers than sellers.

We know positioning in equities was stretched to the short side (that is lots of folk had positions on already expecting markets to fall) even a week or so ago before last week’s big sell off and Monday’s short term pessimistic crescendo. So that tells us that the firepower for further declines is reduced – think of it as spend your money early or firing off your bullets too soon.

We then had some bellwether markets like Gold and the AUD hit and hold significant technical levels above USD 1527 and 0.9608 respectively and then the traders came back in buying. Shorts need to be covered and we get a rally. Easy right!   

But please don’t confuse this with a resolution to this crisis. I hope Europe gets its act together and I hope that markets can settle down. But the economic reality is that whatever the solution in Greece it is not alone in its need to get out from a mountain of debt. Whether it is austerity at a sovereign governmental level or “austerity australian style” where households aren’t spending so they can rebuild their balance sheets the end result is lower aggregate demand and a weaker local and global economy.

We’re not always bearish and the last day and a half has been a fantastic trading opportunity for the opportunistic. But more medium term the headwinds remain. So we remain circumspect in our positioning.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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  1. Watercooler talk: Tale of 2 economies – USA and Australia :: Verity Business Solutions Pty Ltd - September 28, 2011

    […] computer stack – Oracle hp itanium – Sap enterprise software – Why HP should merge with SAPSnapback – Markets bounce but is it sustainable (function() { var bsl=document.createElement('script'); […]

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