Australia Elections and Questionable European Stress Test's Turn Risk Off - for the day
07/09/10 13:37
Cross currents have traders clouded on where to
focus. Friday's NFP supported risk through the
weekend until news reports, calling into question the
credibility of the bank stress tests, filtered
through the wires causing a EUR sell off. This was
accompanied by uncertainty around the Australian
elections. It appears the final 2 standing
independents figure the mining tax would aid in
cutting pollution and serve them well thus lending a
vote to the Labor Party for the win. The RBA
statement was secondary and AUD pulled back into the
comfort zone of the range. Our view for the near term
is mixed, at present. We anticipate sideways equities
markets and risk-on/risk-off in the near term and
feel it will be a traders market. We are buyers of
dips on AUDUSD, AUDJPY and EURUSD and sellers of
rallies at key levels discussed in Pro Traders Club.
EURUSD is potentially forming a nice right shoulder
here in the low 1.2700's that may bring a move above
1.3000. We need to see micro price patterns build
support at current levels. This will be reviewed in
Pro Traders Club.
Fridays non-farm payrolls report has wiped sweat off the brow of the FED as it buys time to welcome more positive economic data and avoid QE -2 that the market has feared. The NFP report was not as bad as general "economists" consensus had feared. 54K Jobs were lost in the month of Aug. Prices initially spread in favor of USD in thin liquidity while the markets digested the data, but quickly lost ground when non-manufacturing sector showed weakness in the services activity. Following the data, risk continued to dominate as the USD weakened on strong equities.
Equities kicked in and the S&P eventually finished +1.3% higher. US 10y yields climbed 10bps, but fell back to close just below 2.70%. EURUSD traded 1.2804-1.2898 and USDJPY 84.22-85.23.
Although the economy continues to struggle and the unemployment rate is likely to remain impactfully high, Friday's employment report is an important step in the right direction, and should weaken the case for additional quantitative easing on the part of Fed. We remain constructive on the US dollar into year-end on the expectation that US data will stabilize over the coming months, while the Eurozone, the UK and Japan, are likely to witness a moderation in economic growth. With US markets closed today, no US economic data is due.
Post NFP, improved risk appetite has pushed yields up globally, the jumps recorded in the Low Countries do not appear commensurate with their risk preferences. Politics are to blame, with coalition talks collapsing recently. With political discord particularly unwelcome at a time when governments want to lower borrowing costs, investors will increasingly need to watch political risks in the Eurozone.
Renewed worries about the European banking sector kept risk sentiment muted in European hours. Among other factors an article in the WSJ weighed on sentiment, as it pointed to flaws in the design of the European bank stress tests, and it was claimed that the sovereign debt holdings of some banks may have been understated as a result. Most European stock market indices are trading in the red.
I am hoping to produce a video this week on trading un-leveraged and risk management. Stay tuned.
Source: UBS, Bloomberg, Chris Lori