View: Sit with trends buying stocks into weakness, bearish UST’s and short EUR/USD
Election-day and markets are typically sedate, more out of habit than anything else. We find it difficult to become overly excited at the outcome whoever wins seeing rather limited room for policy manoeuvre going forward. While much has been written about the positive prospects for the US economy should Romney receive a mandate we’re not convinced it would herald any marked shift in trajectory, certainly a sustainable one. We have no concerns Romney would be a Tea Party-ite, more the moderate he has spent most of his career and the more radical campaign promises should be whittled back accordingly, including many of his tax reform ideas which look incomplete to put it modestly. But he would face similar obstacles to Obama in dealing with the fiscal cliff, particularly if the Democrats remain in control of the Senate and the debt ceiling might even be more of a contentious issue with a Republican at the helm as expectations shift accordingly. There has been much chatter about the impact Romney would have on the dollar, which seems to centre on the hostility towards Bernanke and his QE programmes. While this might mean Bernanke takes the easy way out by standing down when his term expires in January 2014 we doubt it will have any immediate impact on easing with any President likely to be seduced by the prospect of the easy stimulus/scapegoat package.
Full report below…
View: Buy S&P 500 dips with new highs in mind, leaning on 1,361 support
There is something of a mismatch between our short-term bullish expectations and more cautious mid-term equity views, built around how the longer-term charts have been developing, which makes the current corrective price action rather tricky to interpret. This degree of ambiguity is also reflected in the more immediate fundamental drivers, specifically what has so far been a disappointing earnings season not to mention the closely fought US election contest which has added to concerns surrounding the fiscal cliff. One could perhaps tack on the immediate failure of the market to rally on all that liquidity goodness delivered by Bernanke, QEinfinity as some have dubbed the open ended programme, as a further sign that the rally has exhausted.
Full report below…
View: Near-term equity upside doesn’t change longer-term bear picture
The returns from the summer’s front running exercise have been very healthy across many equity markets but now central banks have actually delivered, directly in the case of the BoE, the Fed and as of this morning the BoJ and via promised intervention by the rather more standoffish ECB, the question comes back to whether this move is actually sustainable. As ever there is the sales pitch that valuations are compelling which appears particularly relevant for the beleaguered Eurozone periphery and the more dubious view that higher equity markets themselves are a precursor to better economic times. Of course the central bull driver really is positive expectations as to how this further quantitative easing will impact asset prices, reflecting on the lift risk assets saw following QE1 and more relevantly QE2.
Full report below…
View: Fed expectations buoy stocks, better risk reward looks to be Gold
Reading through the Fed minutes is the boring part of those Wednesday evenings, far more entertaining is just how the market interprets what is often just subtle tweaks in the committee’s rhetoric, the August minutes being an excellent example of this. Headlines would lead us to believe that there has been a substantial shift in tone, inferring that the Fed has now primed the market for QE3 in September, snatching the comment that the Fed “will provide additional accommodation”. However, this overlooks the balance of the sentence which read “as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.” Together this is far from a definitive statement even if it sounds a little more accommodating than the minutes from the June meeting which itself is unsurprising given the data flow which completed the picture for (the softer) Q2.
Full report below…
View: Mid-term European index charts remain bearish, prefer US exposure
Equity markets have begun to look shaky again, the usual catalyst driving things namely the simmering Eurozone debt crisis with Spanish bonds pushing to yet higher ‘unsustainable’ levels while the Troika’s visit to Greece has rekindled Grexit chatter, a scenario where one should be thinking about ‘how’ rather than ‘if’. For the moment the moves in the main markets still look corrective within the broader up move we’ve seen since the start of June but support does look vulnerable. The fundamental story carries so many risks that expecting the market to be able to sidestep all of them is just hope. We also don’t subscribe to the view that equities are ‘cheap’ as the bulls continue to plug and that the macro backdrop is priced in, particularly with regard to the European bourses. The other bullish pillar of support is even more perverse from an investment perspective, the expectation of another injection of liquidity from those modern day alchemists the central banks, seemingly oblivious to the factors motivating these interventions. It might be kinder to say this demand is being driven by fear of missing out on the next rally, not that we’d expect one.
Full report below…
View: DAX bounce should be used to rotate to US equities
You have to admit the equity bulls have control when a batch of very dire European PMI releases are shrugged off when a modestly higher US equivalent turns up later in the afternoon as was the case on Monday. It is perhaps more surprising given that this was the manufacturing survey, when we all know that in the US services make up 70% of the economy and the (currently rather cold) boiler room of the European economy is those hyper-efficient German manufacturers. Of course the market had already had a heads up following the flash European numbers but it’s hardly as if US consumption is going to come to the rescue of Europe, in fact there has been debate on how weak European demand is dragging on growth in Asia.
Full report attached:
View: Fed’s stance a short-term headache for USD, impact on risk assets more prolonged
I started to write this note on Sunday which is a lesson as to why one should finish things at the time and not let them slide down the pile. At least with the FOMC now out of the way we can add some additional colour on how the DXY is trading and the implications this should have for markets overall both in the near-term and in the coming months. We identified the technical reversal signal seen in the dollar index in our weekly strategy, last weeks close leaving a nice bearish engulfing pattern on the chart which not only spanned the previous week’s trading but the one prior to that, adding some more force to this set up. Following the Fed last night we can add some further insight to this view and frame it more effectively in a macro context.
Full report attached below…..
- Weak $, many say risk on, I say self defense (ritholtz.com)
- Previewing Today’s Economic Events And FOMC Announcement (zerohedge.com)
View: S&P bull/recovery move has room to run, target 1,374+
One of the more overused words so far this year has been de-coupling as the market caught up with the relative outperformance of the US economy vs. the Eurozone. But we doubt this is a buzzword that will disappear anytime soon. The challenges facing Europe can’t be resolved overnight with the current policy mix if anything adding to downward pressure on the periphery economies. The US of course has yet to fully tackle its fiscal imbalances but unlike Europe there are signs that the economy has found some momentum of its own, which while short of the pace of the noughties still look like it could be self-sustaining.
This sentiment has been seen both in the dollar (which we continue to view very positively) and the relative health of US equity markets. As we noted in the weekly (16th Jan) the near-term technical picture for the S&P is bullish and the positive close we saw on Wednesday, which marked a clean break of the 1,300 line, is further evidence of improving sentiment. Even bad news is having a minimal effect at the moment, S&P’s Eurozone ratings downgrades failing to dampen the mood nor has the so far disappointing US earnings season which is often a sure fire way of squeezing out those less committed hands
Click for full report ………………………
View: Tactical equity shorts on Greek moves look smart, 200-DMA the stop for SPX
While the world frets over renewed frictions in Europe it’s worth a quick look at where the Greek developments leave markets from a technical perspective. Looking at the S&P500 in particular it makes things look very interesting indeed. The Elliot Wavers had already identified the sell off from the April highs as a five wave down move but this was all contained within the first wave of a larger bear move down. The recent recovery (ABC rally) then took us to a wave two top based on this count, which should now develop into wave three down, the largest move in the sequence.
The malleability of the Elliot rule set doesn’t sit that well with us but it does at this juncture allow us to create some clearly defined risk reward parameters for trading from a short base, lining up the 200-DMA at 1,270 as the stop level, aiming for a break of support at 1,175.85 in the first instance but really looking for a more aggressive retracement back toward 1,100 where we’d look to reassess the picture. Based on our longer-term charts an Elliot style wave three would have the power to take the S&P down towards the 900 level which doesn’t look that unreasonable given the backdrop.
US data hasn’t been printing so great this week either, Chicago PMI and the Manufacturing ISM number both coming out towards the bottom end of market estimates, which might add credence to the move (note at least a chunk of the recent recovery was due to the market pricing out prospects of recession due to better data). There are still a handful of important releases to go this week, payrolls included, but as we noted in our recent piece on the Q3 GDP performance, economic conditions will remain hostile so it’s unlikely they will be enough to offset the European crisis.
Those looking for more of a kicker could do worse than taking another look at the DAX. Although this index fell 5% on Tuesday at 5,834 it is still trading at levels that don’t fit with a disorderly Greek default and the risks this throws up for the Eurozone. Volatility looks set to remain elevate which might bring higher selling levels but while the cash market stays under 6,165 on a closing basis the bears have room to run. We’d remind that as of Tuesday’s close the index is still 17% above the September lows (4,966).
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