09-07-2010: Last week began with disappointment stemming from Japan’s lack of direct currency intervention, and risk aversion looked probable to continue into the week. This was not the case as better-than-expected Australian 2Q GDP started a ripple effect, culminating in a global wave of positive data surprises.
Upbeat manufacturing numbers midweek out of China and the U.S. saw safe havens soften and sent U.S. equities soaring higher by greater than 2 percent Sept 1. The positive data stream continued Sept. 2 as U.S. July Pending Home Sales printed a much better than consensus +5.2 percent, as compared to an expected -1 percent decline.
Friday’s much-anticipated NFP capped the data session as private payrolls jumped by +67,000, and the headline number declined by a less than expected 54,000 versus expectations of a 105,000 drop, seemingly cementing a renewed emergence of risk appetite.
Negative sentiment looks to have reversed with the prior week’s data releases, but this most recent risk rally faces a number of hurdles in coming weeks.
September has historically been an underperforming month for U.S. equities, and with the S&P facing critical resistance into its 100-day simple moving average, currently 1105/10, along with a major horizontal pivot zone into 1130/35, we may see near-term upside capped into these levels.
Until these key price zones are breached, the current rally cannot be viewed as anything more than a correction toward range-bound conditions.
Furthermore, much of the large moves realized last week have occurred on extremely thin liquidity representing the opinions of a smaller percentage of market participants. Normal liquidity conditions should return this week.
Price action in correlated markets also seems to confirm further circumspection into the current market euphoria. Gold, the alternative currency and a constant in the “safe haven” asset class continues to trade at elevated levels into $1,250 per ounce. This may be a result of the softer dollar, but the yellow metal’s divergence with risk suggests further downside could be in store.
Elevated levels are a theme shared by European debt spreads as well. Although Friday saw core-periphery spreads tighten, mainly as a result of a shot higher in German bond yields, they remain near May pre-crisis response levels and indicates continued concerns about the peripheral eurozone (Ireland, Greece, Portugal) are highly probable.
A MULTITUDE OF INTEREST RATE ANNOUNCEMENTS
This week sees a number of interest rate statements, beginning Down Under with the RBA policy rate decision on today.
The Reserve Bank is likely to remain on hold, but accelerating growth evidenced by the stronger 2Q GDP suggests tightening for the following November meeting is an increasing possibility.
The BOJ interest rate decision, also scheduled for release today, is likely to be a nonevent as the target rate will remain steady at 0.1 percent. The focus in Japan remains on continued intervention speculation and the political uncertainty surrounding the September elections.
Tomorrow sees the Bank of Canada rate decision and the market consensus for a 25 bp rate hike to 1 percent seems less of a likelihood, considering the worse-than-expected 2Q GDP print of 2 percent. The risk is for a higher USD/CAD as the market seems divided with a slight edge for a 25bp rate hike.
The increasing uncertainty surrounding the decision may see the Canadian dollar weaken considerably if no tightening measures are taken.
The heavy week of interest rate announcements winds down Thursday as the Bank of England is expected to keep the target rate steady at 0.5 percent. This is likely to be a nonevent; the BOE’s policy is to withhold any post-decision press conferences unless there is a change in the target rate, and the focus will most likely be on the bevy of data scheduled for release next week.