Lighthouse Morning Market Wrap – It’s the economy Stupid

June 22, 2012

FOREX

When I first became a currency strategist at Westpac back in 1998 there wasn’t really anyone to benchmark yourself against. Sure Jim O’Neill was at Goldman Sach’s but in Australia I don’t think there were any other Currency Strategists. I remember my wife, Lisa, asking me what I was going to do as I prepared for my first day and I answered – I’m going to wear a suit (Westpac was casual at the time).

I genuinely wasn’t sure how I was going to add value to the desk and the clients but I loved Forex so much and was good at markets so I had to have a crack and I was thankful for Westpac and David Beale for giving me the chance. What I ended up doing, to start at least, was simply share my notes that I took each morning and the process I had been following for the previous 10 years. Now in 2012 of course there are a billion “morning notes” or market wraps but at the time back in 1998 besides the equity broker reports and Westpac’s “while you were sleeping” morning reports were something of a novelty.

But I am a morning report writer and a morning studier of markets. So I offer you my morning thoughts and hope you find them useful.

Please note I have been doing them for my self this week so there are references to previous days.

It’s the economy Stupid

Global growth worries hit markets hard over the past 24 hours as disappointment with the Fed’s Twist morphed into full-blown concerns about the parlous state of growth. As I write Nymex crude has tumbled another 3.3% to USD 78.35 Bbl, the EUR is off 1.2% to 1.2550, the AUD has tumbled to 1.0034 from a high yesterday above 1.02 and the US equities markets are all off 2% or more with the Dow tumbling more than 200 points. Even gold, which is supposed to be a safe haven isn’t it, fell 2.5% to USD 1565 Oz. Elsewhere Moody’s is said to announcing today the downgrade of a number of large Investment banks.

It has been a core tenet of ours writing here and at MacroBusiness that the global economy is in the grip of a necessary de-leveraging cycle and as such ultimately what the markets current reason for ebullience the reality of a low growth future will ultimately win out. From a trading perspective this is fantastic because it means you get really good up and down markets and thus opportunities to profit.

But for those who have still not forgotten their training of the bull market in equities and who still, even now, believe that central bankers can fix things with the stroke of a pen or an infusion of cash there are big disappointments.

Such was the case last night when the convergence of forward-looking economic indicators from China, through Europe and into the US spoke loudly that “It’s the economy stupid” and its weak.

China got the ball rolling with the HSBC/Market Flash PMI which continues to be well below the 50 line of expansion or contraction. As you can see in the chart above courtesy of Scott Barber of Reuters the relationship between the Flash and Official PMI is not perfect but there seems to be a long-term downtrend here anyway.

This release got the bearish ball rolling in Asia yesterday and the release of the German PMI confirmed that even as the Germans are slowly being pulled toward the role of European saviour they seem inextricably being pulled toward their own economic problems. The Composite German flash PMI is at a 36 month low of 48.5, as is the Flash Manufacturing PMI sitting at 45.2 while the services Activity index is at a 7 month low of 50.3.

The broader Eurozone PMI speaks for itself and the implications for European growth and by extension the real chances of austerity actually working in any country. So you won’t be surprised that the Euro had a bad night – we’ll look at the outlook below.

Across the pond in the US, flying straight over the better than expected UK retail sales which came in at +1.4%, the Philly Fed index was a big disappointment falling to -16.6 in June versus -5.8 in May. This is a massive deterioration of business conditions in the mid-Atlantic region of the US with new orders tumbling to -18.8 from -1.2. Manufacturers were however a little more optimistic about the future – hopes springs and all that…Elsewhere US Jobless Claims dropped 2000 to 387000 and existing home sales in May dropped 1.5% while prices rose 0.8%.

Lets have a look at some of the markets we follow.

Earlier this week I said I thought that Crude (remembering we are always talking about Nymex unless otherwise specified) looked wobbly and was headed to test important support at 79 and change. Over the ensuing few days it tried to rally and then has crashed heavily from above 84 to the current price just above 78. It is now sitting right on support on both the daily and the weekly chart above. Should it close below here this week then the outlook turns toward 75 and then ultimately USD 66 Bbl. Stops could be tightened now on shorts.

1.2750 just proved too hard for EUR to crack this week – sure it tried for 3 or 4 days and as much ebullience as the market could muster about Greece and Fed action still couldn’t get it through. The Daily chart above suggests to me further downside however probably not in Asia today given the hourlies look a little over cooked.

Ahh the Aussie battler – normal transmission always returns when the market is in a funk and it’s not only losing ground against the USD but also the EUR with EURAUD rallying from 1.24 earlier this week to 1.25 now. That tells you the old drivers still work for the AUD and that it is truly about growth. The hourly chart above suggests that the AUD might consolidate in trade today and for those following the calls we were stopped out of our long and am now net short AUD from the trade idea of earlier this week. Clearly this one was uncomfortable for a while but the stop was placed above the measured move zone from the pennant breakout so we are still in the game.

Just quickly on the S&P 500 the close this morning on its lows, virtually, and below the 38.2% retracement of the recent rally is a bad sign for the bulls and suggests further downside in the current environment. Some Elliott Wavician friends of mine reckon the rally was just a 3 wave consolidation of the selloff we saw to the end of May which is somewhat ominous.

On the Data Front

In Germany we get the Ifo Business Climate indicator, Consumer Confidence in Italy and Canadian CPI. Also watch out for anything from Europe on the crisis.

Have a great day

Greg McKenna

www.twitter.com/gregorymckenna

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.

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