BY Judith Waker: There is a video of this post at the end of this article.
The trading community have one primary focus and its all about sentiment.
In the last few weeks reaction to geopolitical events has been the main event with unrest in so many key economic geographical regions.
After this week of news it would be easy to assume that not much happened in that arena but in fact there was just as much going on, especially along the Russian Ukraine border but it was clear that it had little to zero effect on equities bonds or any other component of the overall market.
This chart of the S&P 500 shows the sheer strength of this months move as we move into the final week.
The daily chart also of the S&P 500 shows how the market shrugged off all events until friday posting a new high for the week a fraction above 1991.
The Dow Jones resumed its uptrend with equal force catching up most of the ground it lost in previous unsettling and somewhat nervous weeks . This a weekly chart.
Risk on environment was clearly affirmed in the equity market …for now, but whatever did go on this week along the Russian border, I am quiet sure Mr. Draghi didn’t miss it even if the markets showed little interest.
The Search for Catalysts
As we are all aware the focus centered around FOMC minutes released last Wednesday and more importantly the meeting at Jackson hole. Monetary policy is the next major catalyst ignored at our peril. When the statements come, so do the assessments and the reactions. Are they dovish or hawkish, were they more dovish than last time?, Were they silent on the more dovish previous comments; is hawkishness creeping in? Is either implied? The task of eliciting a view (let alone a strategy!) of the language in order to get a handle on sentiment is much more of an art-form than a science.
In Jackson Hole on Friday the chair-persons of two most powerful Central Banks in the world came forward with speeches within a few hours of each other and with the benefit of hindsight the outcome should not have been a big surprise. Yellen went first with US unemployment at 6.2%, Draghi next with Eurozone unemployment at 11.5%. The odds seemed already stacked.
The journey of the Dollar this week was exclusively about the comparatives of Euro and US monetary policy.
Earlier in the week the FOMC reiterated it’s intent to support the recovery and on Friday Ms. Yellen referred to the ‘congressionally mandated goals of maximum employment and stable prices’. She gave birth to the theory of pent- up wage deflation holding down wage growth but which could quickly be absorbed. So whilst nothing overtly hawkish in her words she started to reveal the overtones of a shift in policy centered around the improving labour market, prompting the question ‘under what condition we shall begin dialing back our extraordinary accommodation’. The adverb was enough for the hawks to consider flight. She continued more explicitly that if progress continued, ‘then increases in the federal funds rate target could come sooner than the committee expect’s. Finally, maybe to keep the excited hawks in check ‘ ‘under-utilisation of labour resources still remains significant.’
One might begin to feel a little sorry for Draghi. Standing ready to adjust his stance further but resisting QE he is looking at an economy with every major indicator in decline. Here are just a few; unemployment statistics
and industrial production
This is the worrying graphic representation of euro inflation…or lack of it to be more precise.
The effect on the EUR/USD was expected maybe before even Yellen started to lean away from her dovish stance. This is a weekly chart;
Mr. Draghi has recently criticised lack of strong fiscal government policies and he more than hinted that true recovery lay not just in monetary policy but in fiscal and structural reforms at both union and national level. He has a major problem and structural reforms are too far away to help in the present crises and certainly not available to fend off the growing risk of deflation. Europe is not a federation like it’s cousin across the pond. Mr. Draghi cannot use QE in the same way as he believes massive purchases have to be supported by national fiscal policy and there is no harmony on national levels. Whilst the US and UK used QE to turn round their economies, Europe resisted. It has brought them to the brink. And if that wasn’t enough, if indeed the Fed does raise rates in the near future, the European bond market is bound to suffer. If Mr. Draghi’s has one glimmer of hope it is that as the USD rises the lower Euro will bring some better circumstances for trade growth throughout the zone. It seems some way off.
The outlook for the Majors
Fotis provided a look at last week’s Morgan Stanley report and even before Jackson hole, they saw the Dollar as a long for the medium term at least, with the Euro doves still ensuring a weaker currency and bonds remaining unattractive in the long term. They noted that inflation was not as the BOE hoped for so the GBP remains a selling opportunity, much more so after Yellen. They expect the Swissie to soften as the Euro falls and note that the data from Australia is weakening. There most bearish outlook was for the Kiwi, with milk oversupply farming sector debt and another deflationary scenario. Trade balance later today,may spark some trading in the coming week, most obviously, NZD/USD pair could be a selling opportunity on a pullback to 0.8517, or a break of the weekly 38 fib.
The Loonie, CD, has some good data last week with core retail up and wholesale sales above expectations. With the strengthening dollar there may be another selling opportunity in the USDCAD but not one to trade whilst the data is strong.
A Closing word
It should be noted that equities rose strongly even with Yellen hinting at rate rises, its enthusiasm for risk seemingly undinted that whilst she did so Gold experienced a further drop to a 2 month low.
Meanwhile PMI’s across Europe continue to disappoint adding more to the burden Draghi is carrying which includes Russia, disparate governments and inevitably a Union without any sign of fiscal Unity.
Judith Waker
The Shifting Sands of Sentiment
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