Global Macro Update
Submitted by Nic Lenoir of ICAP
As we indicated yesterday to start the week and the session, we feel the sell-off in risky assets has started to show some divergence in the short-term. We had highlighted this pointing out the commodity space which had started to turn yesterday. That divergence was confirmed with commodities screaming overall higher today, led by Gold. That is all the more interesting given that the dollar index was actually up on the day. Breakdown in correlations however is not uncommon around pivotal points, quite the opposite in fact.
Short term the dollar index in fact has rejected the 50 dma today, and we observe the same for EURUSD. On the Dax we indicated yesterday we were temporarily exiting our short recommendation waiting for a bounce as the 100-dma was tested as support. S&P futures look like they could be turning but so far have failed to break 1,043.5, which is the short-term resistance. A break past 1,043.5 and 1,049 will confirm our expectation to retest at least 1,065/1,070.5 as resistance before the next wave of sell-off. However, I am a little bit surprised by the lack of participtation today after the price action yesterday. I will therefore temper my view, as my original thought we would see 1,012/1,020 could end up playing out in the end. I am only suggesting this because we have actually retraced a lot from oversold levels in terms of momentum indicators while making very little progress to the upside. The wave structure for EURUSD also troubles me a little bit. While on a daily basis we rejected the 50-dma, the last leg lower appears incomplete and we have failed to accelerate. It is possible that intraday tomorrow or overnight we retest the lows before moving on higher in EURUSD and S&P futures as a result, but the overall view of consolidation as slightly better risk appetite remains the same for the next week or two as long as the moving averages mentioned hereabove are respected on a daily close basis.
On a more medium term basis the daily chart on the S&P and Dax show that as long as we remain under 1,070.50 and 5,600 we remain in a bearish dynamic and we will try to highlight goo entry points for fresh shorts as opportunities arise.
We are at an interesting crossroad. The employment chart shows that as of last month NFP was probably understating by at least 100K. However, the series on the chart do not show the recent ISM employment component which historically would be more in line with +200K NFP. While I think the underlying economy is weak and structurally unsound, there appears to still be momentum on the upside in economic data. This was highly questionable as of two weeks ago, but the employment component is a real game changer here. We may in fact have another 6 months of momentum under us. I personally think this is dramatic, because this may reload the fuel tank of the bubble/carry-trade at a time when balance sheet woes seem to catch up with rather optimistic valuations to say the least. Unless governments pull the liquidity rug from under this market, and I mean this globally, we are at risk that the bubble might inflate further, and another jobless (positive NFP is nothing to brag about in itself) recovery with 10% inflation in healthcare costs, housing, and school tuition will follow before another implosion a lot more pronounced than last time around. It is dramatic but a real risk, and I don't think that in such an environment a collapse of the carry trade is seriously possible to threaten this imbalancing act. The cycle keeps going on with more and more amplitude on the downside, this is bad resonance...
For now sell a bounce in risky assets using 1,070 for the S&P future as a proxy for a good entry level to play a retracement to 942 or 875. Beyond that we will have to wait and see if any wisdom enters the minds of central banks and governments. Just keep in mind that Brazil stocks 400% up in 10 years, jobless recoveries, countries pegging currency to others while showing 8% better growth numbers, and higher commodity prices in the face of little wage upside pressures and serious slck in the economy is not a recipe for anything viable. The only end game will be lower prices in all asset classes, including bonds. Whether it happens after an artifical wave of asset inflation which is not confirmed by artifically tamed economic measures of inflation is the question. Maybe when we have pictures of under-educated children fed with unhealthy food playing on their cheap video game system in front pages of newspaper will we address the problem!
Good luck trading,