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- Interesting moves in Asia
- EUR/USD breaks the overnight highs
- Gold finding sellers on rallies
There have been reasonable moves despite traders still not seeing any dramatic clarity around the US government shutdown and looming debt ceiling; it therefore seems these have been a function of low liquidity.
The first big moves were seen in S&P futures, with the index hitting a low of 1673, a fall of 0.6% from the cash close, before rebounding. The fall happened in the so-called ‘twilight’ zone (between the US/Asian handover) and therefore liquidity was thin. If there is going to be a decent move, it’s often going to be here, and thus we don’t generally pay a huge amount of attention to it. Perhaps the other big move was in the EUR, with EUR/USD breaking the overnight high of 1.3607, subsequently triggering stops in the market. This strength was reiterated through the crosses, although we suspect EUR/JPY was right at the heart of it.
The Italian confidence vote went to plan
The Italian confidence vote went to plan and it’s interesting to see some good buying in Italian treasuries, while on the other hand there was some modest selling in the closely-correlated Spanish bond market. Some of the short-term political risks have now been removed, however as a number of political commentators have argued, this is Italy and therefore there will always be medium-term political risks. The ECB meeting went generally as planned, however the press conference (a short while after) was the bigger talking point. It’s funny how traders have talked about doing a double-take as they thought Mario Draghi had somehow turned into Jean-Claude Trichet, taking a more hawkish view than the low levels of inflation in Europe provide scope for. We also now believe there will not be any extraordinary measures being provided in the near-term, although this could change in late Q1 2014.
EUR/USD looks overbought (as does GBP/USD), however with the ECB showing no real concern about the pair approaching the year’s highs of 1.3711, and the Fed waiting to see the fallout from the fiscal dramas; it’s just become a bit easier for the bulls to make the case that new yearly highs could be seen in the coming weeks.
Equity strength a function of poor volumes
On the equities side, the ASX 200 has performed strongly, helped by some buying in resource stocks. Volumes have been poor, with A$1.888 billion traded, which suggests a day of value under A$4 billion, significantly under the years average of $5.03 billion. There has been talk the Chinese services PMI print at 55.4 put a bid in the resource space, however if you look at the price action in some of these names, the big moves came prior to the data point, although the strong numbers did support. Importantly the forward-looking ‘new-orders’ component showed good expansion at 53.4 and came in the highest since January. The more inflation-focused ‘prices charged’ and ‘input prices’ both grew at a slower pace, thus this print was as market friendly as we could have hoped. With the Chinese equity market still closed, the ASX 200 took direction from the Hang Seng (probably the best proxy aside from the AUD on Chinese data), which is gaining 1.0%.
We’ve seen good sellers in spot gold today, after yesterday’s rebound off $1277 (the 61.8% retracement of the $1180 to $1433 rally); with the daily MACD firmly below zero, I’d scale stops down to the $1440 (just above the June 28 downtrend) and a break of $1277 could be the point at which to add. On the fundamental side, the debt ceiling is a growing concern, and it’s getting to a point where traders will start looking at more aggressive hedges. How many times of late has market consensus been so wrong? With just fourteen days until the debt ceiling is reached, it won’t be just the US T-Bill market that is going to see aggressive moves soon. Today’s jobless claims will be interesting, especially as the last few months have seen the four-week average fall to 308,000 – a number thematic of a non-farm payrolls print over 200,000. On a pure risk/reward basis you have to think it will take a number sub-300,000 to cause a sizeable uptick in the USD and equities on this data point alone, however a number that pulls the four-week average significantly higher could have more influential ramifications.
Flat open expected in Europe
European markets look like having a pretty uneventful open, with even the Italian MIB opening on a flat note. Traders will be looking out for services PMI numbers in Europe and UK retail sales. In the US we get speeches from Fed members John Williams, Richard Fisher, Dennis Lockhart and Jerome Powell. Keep an eye on the US services ISM, which recall printed 58.6 last month (the highest since December 2005) and is expected to see a slight contraction in the pace of expansion (consensus at 57.0). Given the services sector is so much more influential to US growth than manufacturing, this print is important. Recall also, the employment sub-component last month saw strong expansion at 57.0, and thus this will also be hugely important in providing support for views around the non-farm payrolls print – whenever that is realised