Market Recap: 11.18.2010

Tyler Durden's picture

Summary

  • The equity buy program was running during US hours as well. A much better Philly FED print – very reassuring after last week’s awful Empire number – was enough to take SPX back above its 21d (1193). However, 1200 is proving tricky. Above there an Elliot Wave theory would suggest 1300. Light levels of risk is also encouraging. Flow was skewed towards much better buying from leveraged accounts, most covering tactical shorts. SPX closes up 18 at 1197. The DOW closes up 173 at 11181. The NASDAQ closes up 38 at 2514.
  • The VIX plummeted -3.01 to close the day at 18.75, completely erasing the past week’s gains.
  • The dollar is mostly stable during NY trading – caught between the push of Treasuries and the pull of SPX. EURUSD briefly dips back below 1.3600 following the much better Philly FED print – the market focused solely on the sell-off in US rates. But Bunds were hit hard today too – and to a larger extent than their American counterparts – this shouldn’t be overlooked. In fact, given the rally in stocks, the relative performance of fixed income, and the tightening in European CDS, it’s really surprising that EURUSD isn’t much higher. The legacy long (and underwater) EURUSD position is bigger than originally thought. And in that case, those looking for a European recovery trade – or a risk recovery trade for that matter – should consider EURCHF. The legacy position there is still surely short of EUROs. As a positioning kicker, tech funds still have USDCHF shorts to cover. The dollar was very close to recovering parity today. Elsewhere, EURGBP continues to struggle with its 100d (.8465). USDJPY is running into decent technical resistance, but most are playing for a break to the topside. 88.00 looks like a reasonable target – especially if 10y US yields head towards 3.10 / 3.15%.
  • The rates market was again choppy but ultimately finished 0.5 to 6bps weaker with the 7yr underperforming.  We reached the day’s low post Philly Fed but then rallied back through the rest of the session helped by heavy overseas buying.  The Treasury announced front end supply for next week and we will get $35bn 2yr , $35bn 5yr and $29bn 7yr.
  • With the exception of natural gas, every commodity in the CRB makes gains today. Silver adds 6%, making it 11% from yesterday’s lows. Gold too bounced, albeit more modestly. Crude up $1.50 with the October low (80.60) providing good support. Cotton traded limit up intraday on news that Chinese crops might be damaged by bad weather.
  • Credit spreads were driven tighter by higher equities today and some short covering of risk, bringing spreads back to levels where we started the week. Protection on IG was surprisingly bid all day, underperforming HY, perhaps as a result of index arbitrage interest in the market.  IG tightened 2 bps to close at 90.50 and HY rose almost 1 pt to close at 100.5625.
  • Tomorrow brings a central bank meeting in Colombia, producer prices in Germany, and a speech by Bernanke at the ECB conference in Frankfurt

And some in-depth observations on FX, via Talking Forex

EUR/USD
 
The combination of a higher close in the Shanghai Composite index, as well as comments from Ireland’s Honohan who said that he expects the support package provided by the EU/IMF to be in the tens of billions of EURs prompted a relief rally across various asset classes. In turn, EUR staged a rebound following days of heavy selling and finished in the mid-1.3600 region on Thursday. However it remains highly uncertain whether today’s price action is the beginning of a so-called recovery rally or just a temporary pit-stop ahead of further selling. As such in order to stabilize financial markets and reassure the investment community over the future stability of the Eurozone policy makers must not waste time and announce a credible package for the likes of Ireland and Portugal. In terms of technical levels, to the downside support levels are seen at 1.3600 and then at 1.3580. On the other hand, a further rebound by the pair will see resistance levels met at 1.3665/80 and then at 1.3700.
 
 
GBP/USD
 
Similarly to EUR, GBP benefited from a weaker USD and posted modest gains against the greenback on Thursday. A better than expected CBI report was somewhat counteracted by a less than impressive retail sales report however the return of risk appetite amid a looming resolution regarding Ireland kept the bullish pattern intact. There are concerns that UK banks will be among hardest hit in an event of any debt restructuring in Ireland and until there is a reassurance from policy makers that bondholders will remain unaffected, GBP may find it tough to gain against EUR. The latest analysis by the BIS reveals that UK bank exposure equates to GBP 140bln. In terms of technical levels, to the downside key support levels are seen at the 50DMA at 1.5852. While to the upside, resistance levels are seen at 1.6040/50 and then at 1.6100.
 
 
USD/JPY
 
The pair finished higher on Thursday after much better than expected US-related economic data, as well as what seems like an imminent resolution to the Irish debt crisis prompted a relief rally. Also, the Japanese cabinet left its assessment of the economy unchanged, while also noting that the economy appears to be going through a so-called pause mode. Still, the price action going forward will continue to depend on the USD and unless EU policy makers come up with a resolution to the EU crisis, the JPY will appreciate yet again on the back of its safe-haven appeal.


Commentary via Goldman Sachs