Stocks end their best month in years, Mario Draghi tries to confuse

Quick Recap

October was one heck of month for global stocks markets with some stellar rises in the US and in Europe. The DAX in Frankfurt was the standout of the big indexes with a near 14% rally after Mario Draghi and his chief economist at the ECB essentially promised that the ECB will ease further at the December meeting. In Paris the CAC rose almost 10% but London lagged undermined by banks, miners and the prospects that the BoE might actually move before the Fed.

They have a very important meeting this week.

Looking to the US and Friday night saw some small falls but that still saw October end the month as one of the strongest in years. The Dow was up 7.23%, the Nasdaq rose 7.35% and the S&P 500 rose 128 points (6.54%) during the month.

The question for traders of course is where to now.

Friday night’s falls in the bellwether S&P 500 saw it reverse off the important 2,100 level I’ve been talking about for a week or so. That doesn’t necessarily mean the rally has ended. But my system has been telling me we are topping for this run so I am so I am now looking for a move to 2,048/50.

Speaking of the outlook for stocks I picked up and excellent characterisation of the stock market price action over at Business Insider on the weekend.

But I saw a great warning hit my inbox from Deutsche Bank analysts Stuart Kirk and Rineesh Bansal on Friday night. I covered it in my Oz Diary but it’s worth repeating that Kirk and Bansal warned that stock investors might want to be a bit careful:

“Equity investors were whistling past the graveyard this week as the Federal Reserve suggested it is still contemplating a December rate increase. Why the uncharacteristic display of nerve? Perhaps the meagre 1.5 per cent third-quarter growth adds to scepticism the Fed would actually pull the trigger. After all, the 31 rate hikes since 1994 were preceded by an average 3.9 per cent quarterly expansion, whereas 1.2 per cent average growth heralded rate cuts. Or perhaps investors are increasingly certain a rate rise does not spell doom. Indeed, the S&P500 rose ten per cent on average in the 12 months following those 31 hikes but fell seven per cent after rate cuts. Be careful not to whistle too gaily though.The only time the Fed raised rates after a sub-two per cent growth quarter, a three-year equity bear market followed.”

History doesn’t repeat. But it does seem to rhyme, so their warning is one worth noting.

The ASX 200 lagged last week’s rallies, perhaps lead this week’s potential selloff, and it continiues to look vulnerable on the technicals.

On forex markets it looks like the Chinese data has knocked the Aussie a little lower on the open this morning. Of course China, and what is going on with its economy, is an important driver of sentiment toward the Aussie dollar. That makes the release at 12.45pm AEDT of the Markit PMI for China eagerly anticipated and a potential market mover. Overall though, USD weakness Friday helped the Australian dollar and others to rally strongly. Euro was higher but rejected overhead technical resistance, sterling was strong and USDJPY is caught around 120 still.

Crude had a great week and rallied Friday night. Nymex crude was up more than 4% on the week. Copper dipped again Friday, gold was off something like 20 bucks on the week and iron ore has stopped falling for the minute.

The overnight scoreboard (8.39am AEDT):

• Dow Jones Industrials -0.52% to 17,663
• Nasdaq Composite -0.4% to 5,053
• S&P 500 -0.48% to 2,079
• London (FTSE 100) -0.54% to 6,361
• Frankfurt (DAX) +0.46% to 10,850
• Tokyo (Nikkei)+0.78% to 19,083
• Shanghai (composite) -0.13% to 3,382
• Hong Kong (Hang Seng) -0.79% 22,640
• ASX Futures overnight (SPI December) -25 to 5,207
• AUDUSD: 0.7117
• EURUSD: 1.1033
• USDJPY: 120.34
• GBPUSD: 1.5448
• USDCAD: 1.3075
• Nymex Crude (front contract): $46.59
• Copper (US front contract): $2.3135
• Gold: $1,142
• Dalian Iron Ore (January): 362 (denominated in CNY)
• US 10 year bond rate: 2.15%
• Australian 10 year bond rate: 2.63%

On the day

On the data front, the week kicks off in Australia with the AiGroup performance of manufacturing survey, ABS building approvals and TD Securities monthly inflation gauge. The latter will likely attract more interest than usual given the low CPI print for the third quarter released last week.

Offshore, the PMIs are the highlight for today with China out today during trade. Tonight the US and German data will be watched closely.

CHART OF THE DAY: Euro

The Euro is charting nicely at the moment. After recovering from last week’s oversold conditions the single currency rallied up to test, and reject, the bottom of the old trend line Euro broke down through recently.

Over the weekend Mario Draghi sought to put a little bit of uncertainty into the ECB’s next meeting. In an interview with Italy’s Il Sole Draghi said “We will see whether a further stimulus is necessary. This is an open question.”

The other question of course is whether the other members of the Governing council of the ECB have told him to pull his head in.

Looking back at the chart you can see the previous support zone is now resistance and Euro needs to get up and through this 1.1080/1.1130 zone before the outlook would become constructive for a bigger surge.

Longer term the outlook for the Euro has and is darkening.