Lighthouse Securities Morning Market Wrap – Markets Breaking higher

July 2, 2012

Bonds, Commodities, FOREX

Cross Posted with MacroBusiness

The European deal announced late in our trading day Friday ignited a risk rally like we haven’t seen for some time. We have trend breaks in a number of markets we follow and the overwhelming feeling is one of relief. Certainly from a fundamental standpoint there are many who believe this is just another band aid on a machete wound but from a trading perspective we must respect the price action in the first and foremost instance but also the fact that Merkel, and Germany (the German Parliament passed the European Fiscal Pact over the weekend), have shifted ground on their previously stated intransigence – and in no small manner. It might be overly hyperbolic to say that Friday june 29th was the day that the Euro’s future was assured but from our point of view it was certainly the day that the political class moved closer to this point.

The key point is of course that Banks can be re-capitalised directly from the European Rescue mechanisms and that in doing so the Sovereign debt positions of their governments will not be impacted (read made worse). Equally by renouncing creditor seniority bond buyers positions are preserved and then in allowing Sovereign bonds to be purchased directly, also by the rescue mechanisms, there is a backstop to overly aggressive market selling. Much detail is yet to be released but if their was a Rubicon in the Euro’s future to be crossed it seems that Merkel has now crossed it.

So markets closed out was was a sour quarter on a much brighter note. The Dow was up 2.2% or 277 points to 12,880, the S&P was 2.49% higher at 1362 and the NASDAQ did best of all to close at 2,935 up 3%. Across the pond in Europe the FTSE rallied 1.42% to 5,571 while continental European Bourses had the afterburners glowing with the German DAX up 4.33% and the French CAC up 4.7%.

These moves eclipsed what seemed to many to be an Asian over reaction Friday but it looks to us like there is further upside potential in Asian and Australian equities today given that nothing happened over the weekend to derail the European rescue will further underpin sentiment in our region.

Obviously European bond markets were better bid with Spanish and Italian bond yields rallying while those of markets such as Australia and the US are under upward pressure as a result of the risk rally and the hope that if this really is a step towards European integration and a material diminution of the chances for a Euro catastrophe then rates might have been too low recently.

On commodity markets it was a night of ebullience with Nymex Crude rocketing 8%+ to USD 84.85 Bbl, Heating oil was up 5.34%Gold was a bit flatter rising only 3.35% but silver surged 4.24%. The market as a whole as represented by the  Thomson Reuters CRB Commodity index was up 12.38 or 4.55% to 284.19. Overall a great night for anything remotely attached to risk and the outlook for growth.

In Currency markets Euro Yen (EUR/JPY) lead the way rising 2.39% this says to us that there was a genuine move away from a feeling of European catastrophe. Indeed the fact that Euro Swiss (EUR/CHF) showed some early signs of life suggests to us that money was flowing back toward Europe from its recent safe havens. Indeed the CFTC data showed an increase in short CHF positions. Consequently the USD was under pressure with the Dollar Index falling to a low of 81.59 before closing at 81.80.

The Aussie Dollar as a bellwether of risk was also higher jumping 1.92% to close the week more than 2 cents off the lows and looking very bullish after breaking out of the 3 month downtrend. The Kiwi (NZD/USD) was also dragged higher up 1.53% back above 0.8000 to the USD. Risk on and the Commodity bloc is likely to power on and we may see the Aussie’s after burners.

Just briefly in other news:.

  • Greek Shipping Heir Nomikos is reported in Spiegel to be launch a fund/charity for his fellow Greeks to donate and then buy back Greek Debt – Brilliant idea they only need $3,000 each person at current market pricing. Then at some point they forgive it – Brilliant
  • So now the UK Telegraph is saying that Glencore might walk away from its bid for Xstrata rather than overpaying.
  • Barclays Chairman Marcus Aegis is apparently the first victim of the Libor manipulation scandal.
  • Bernie Madoff’s brother Peter has pleaded guilty to criminal charges and agreed to a 10 year prison sentence.
  • CFTC data shows room for more rallies in Aussie and Euro as market is still neutral to short.
  • Ford warned of a weaker profit and was down Friday.

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

Copper: Yep copper was one of the lead indicators as it usually is for growth and risk. As you can see here it has pushed through the 38.2% of the recent fall and while it looks seriously overbought on the short term our trend following systems have gone long copper.

Crude: What a strong break of the downtrend line since the May selloff. Short term traders probably went long on the break of the trendline but our trend following systems aren’t long yet – 85.71 is required to get that one long. Obviously the call for a move toward the 66 region is negated by this rally and the hold of the recent lows. Any stops on longs should be below these levels.

EUR/USD: Not quite there yet in a technical sense and Euro needs to break 1.2742. Fundamentally I agree with Bruce Krasting that if this Euro package/idea/solution is going to work the Euro needs to fall and fall substantially. But then I’m a structural long term  Euro bear so please note that.

AUD/USD: The AUD looks like it is headed back to 1.0474 for a full retracement of the late April late May sell-off. The last line of fibonacci resistance is 1.0262 and the AUD sits just below there this morning. My trend following systems are long.

ASX 200: We said higher that the ASX200 was biased higher – it is again today a move to the top of the range at 4150 has to be there and then we’ll see how far it can push on .

On the Data Front

This week as the first week of the month is always chock full of stuff that can and usually does move markets. Here are a few of the things we’ll be watching.

Central Banks: While the RBA is expected to leave rates on hold, and may even scare a few interest rate bulls with any comments about what has just ocurred in Europe the Swedish central bank, Bank of England and European Central Bank are all hoped/expected by the market to give some sort of further accommodation for their economies.

Data: There are lots of things here at home including the the TDMI Inflation gauge, Building Approvals and Retail sales but all eyes will be on the US non-farm payrolls data which is due out on Friday night our time. The market will be expecting it to be on the weak side.

Here is today’s data and you can click here for the full week’s calendar.

And here is how the markets closed on Friday.

Have a great day.

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 MacroAssociates 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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