Chinese GDP data yesterday (+1.7% qoq and +7.5% yoy) wasn’t as bad as the market feared it might be which gave a positive tone to trade over the past 18 or so hours since its release. The retail sales component was encouraging even as some of the components weren’t so but it was retail sales in the US overnight (+0.4% v 0.8% expected) which is probably the more interesting because the market knows, or at least thinks, that Chinese economic growth is slowing but patchiness in the US economy just more more uncertainty into the mix for the Fed and the Taper timing.

In the end though it was marginal new highs for the S&P 500 which rose 0.17% to 1683 and the Dow which closed 0.13% higher to 15,484 and the Nasdaq was 0.19% higher. In Europe stocks closed off their highs except in Milan which finished up 1.08%. The FTSE was 0.63% higher, the DAX rose 0.27%, the CAC was up 0.62% and stocks in Madrid rose 0.13%.

Bonds were better bid as well with Portuguese 10 years down 21 basis points while those in Spain, Italy and the US rallied about 4-5 basis points.

On FX markets the US dollar took a bit of a hit after the retail sales from what had been an improved performance driving the Aussie down to 0.9033, Euro down to 1.2993, Sterling to 1.5026 before all bounced back to 0.9098, 1.3063 and 1.51 respectively as I write. The fact that Empire manufacturing printed 9.46 against 5 expected was lost on the US dollar traders who are now focused on what Fed Chairman Bernanke is going to say later this week when he wanders up to Capitol Hill to address US law makers – what us old blokes used to call the Humphrey Hawkins testimony.

Irrational Exuberence is alive and well

Readers know I’m not exactly a stock market bull but the S&P is closing in on a break of the all time high and based on a system I use of high, retracement to Fibo support and then move back to the high is close to signalling a Fibonacci extension. Of course I will respect the high unless or until it breaks but if we see a weekly close above the current high will target a move, drum roll please, to 1835/40. Now of course every fibre of my being is fighting that notion but the daily and weekly JimmyR is pointing higher – so at the very least I won’t be shorting until I get a clear signal to.



Interestingly though is the fact that so many pundits are upgrading their forecasts for the stock market in the US and Ed Yardeni who is a fellow I used to follow years and years ago when he was at Deutsche Bank and for whom I have always had the utmost regard put out a note overnight which I picked up at BusinessInsider part of which says,

The market’s reaction to Bernanke’s comment suggests that the Irrational Exuberance scenario is back in play. I still assign it a 30% probability. However, it is certainly looking more credible again now that the S&P 500, S&P 400, and S&P 600 are all at record highs. Valuation multiples remain rational, and record highs in forward earnings suggest that the fundamentals continue to support those valuations.

We may be in for another four years of this bull market if it doesn’t melt up over the rest of the year.I noted in the weekly on Saturday that I remain underinvested in stocks and I noted the lack of bearishness in the market as a potential sign that much is built into stock prices I’ll stick with this position but the chances of a blow off seem to be increasing – but then of course we have the taper coming so this could just mean more volatility up and down.

FX markets awaiting Bernanke, Aussie eyeing RBA Minutes today

Given that Chairman Bernanke’s words were the most important thing to occur in FX markets for the US dollar last week the fact that he is speaking twice this week up on Capitol Hill this week means that it is entirely rational for FX players to play the range until that time and the next round of volatility inducing chat from the Fed Chairman. So it was overnight as I noted in the recap above.

But it is worth thinking about what Bernanke might say in the prepared text of his speech and what questions he might get pressed on by lawmakers in the Q&A section of his address. Personally I reckon he is going to continue to nuance the message that the Taper is not higher rates per se. I also expect him to reiterate that just because the Fed is going to reduce the bond buying program does not mean rates are rising anytime soon and to further reiterate the point made last week that the unemployment rate of 6.5% is not a trigger but a guide.

If the message is received then given extreme positioning in the Aussie (-63,255 contracts for big Specs in the CFTC CoT report) and bearishness in Euro (-40,900), Yen (-80,305) and Pound (-34,259) there is a chance of further US dollar weakness.

If however he is forced by lawmakers to state the tape is coming regardless then it could be the US dollar strengthens – I don’t know yet but there are clear levels in all these currencies to trade off.

On the day USDJPY has the clearest levels with 99.49 support and below that 98.80 which I would consider a big break. For the Aussie today a break of 0.9120/30 would open up a decent topside run while the Euro levels are support at 1.2990 and resistance at 1.3092/1.3104.

We need to watch the Aussie today at the release of the RBA minutes at 11.30. How bearish will they be on the economy? Probably not as bearish as they might have been before RBA Governor Stevens lame joke about the deliberations. So the Aussie might catch a lift

On Commodity markets if Gold breaks 1302 I am going to go long for a little run higher of maybe up to $30 bucks obviously with Gold in the $1280′s that seems some way away but it fits with the overall US dollar risks as articulated above for later this week. On the other hand the 4 hour charts suggest that a break of $1273 to the downside would be the break of a little flag and so turn focus lower. As I said there are clear levels to watch across the board at the moment in many markets.

Nymex crude was up a little further as well rising 0.49% to $106.47, Silver was 0.24% higher at $19.92, Doctor copper is at $3.17 lb and Corn and Wheat fell 1.56% and 1.69% respectively while Soybeans went the other way rising 1.73%.

Data

New Zealand CPI and RBA Board minutes before UK and EU CPI and German ZEW survey. The US also has CPI out which could be important given the Fed is fighting potential deflation and this could impact Taper talk. Industrial Production, Capacity utilization and the NAHB market index are also out in the US.

Thoughts, comments, queries together with frank and fearless feedback all welcome. I’m happy to answer questions or comments on the comment stream wherever I can.

NB: Please note all references to rates above are approximate and should not be used for trade reference

- Greg McKenna, Vantage FX Analyst

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