There has been a tug of war today between weak economic data and some slightly more promising signs that Spain could make a request for financial aid in the near-term. The latter has helped to boost sentiment and EURUSD is back above 1.29 as the market seems to be willing to ignore bad economic data after the Eurozone manufacturing PMI rose to a 6th month high, but remained below the key 50 level for 14 consecutive months. Added to that the unemployment rate remained at a record euro-era high of 11.4% and there are now 24 million unemployed people in the currency bloc. These are the “real” problems that the governments in Madrid, Rome, Paris and Berlin have to deal with at the moment. In Athens the problem is even worse. Its budget has been submitted to Parliament today and the finance minister has estimated that the Greek economy will contract for the 6th consecutive year in 2013.
Is Spain moving closer to requesting aid?
So why are markets rallying when this data is so bad? There are a couple of reasons: firstly Spain’s bank re-capitalisation requirements, disclosed in the results of the latest round of stress tests that were released on Friday, show a EU60bn shortfall, easily covered by the EU100bn earmarked for them from EFSF rescue funds. That is one hurdle out of the way, and because the tests were conducted by an independent company the market has taken them seriously. This takes some pressure off sovereign finances in Spain and Spanish 10-year bond yields have fallen today. Also, the finance minister said that Spain was “analysing” an ECB’s aid proposal. This isn’t a confirmation that it will make a request, but it leaves the door open for a formal request in the near-future, which would then (finally) activate the OMT programme. The Spanish Finance Minister said this when he was holding a joint press conference with the European Commissioner for Economic Affairs, suggesting that Madrid and Brussels are in close contact. The market likes what it hears and this seems to be enough to sustain today’s rally. But these gains are unlikely to last as eventually the market will go back to focusing on fundamentals, which are mostly euro negative.
Some good news for the US
There was a positive data surprise out of the US today, the manufacturing ISM in the US came in stronger than expected at 51.5 from 49.6 in August. There were gains in new orders, employment and export orders, which suggest that growth is starting to return to the manufacturing sector. However, there were some worrying signs in this report: the prices paid sub-component rose to 58.0 in September from 54.0 in August. This was down to rising commodity prices, which could erode future profits and spark inflation. While the Fed doesn’t seem to mind a little inflation at the moment, if prices continue to rise at this rate it may start getting worried, which could jeopardise its QE3 programme in the long-run.
The better than expected ISM has helped to boost risk sentiment even further and the pan-European Eurostoxx index is up more than 1% today. Likewise, after testing its 200-day sma at 1.2840 during the Asian session and even threatening to breach 1.28, EURUSD has recovered sharply. The next major resistance level of note is 1.2945 – the Tenkan line on the Ichimoku chart – then 1.2975 and 1.3025.
Gold – the de-facto QE3 trade
The gold price was a big mover today after it reached its highest level since November 2011 and broke above $1,780. The next key resistance level is $1,800. Gold is looking like it is the de-facto QE3 trade and has jumped nearly $100 since Bernanke and co announced its latest round of QE. So is gold rallying because 1, people are concerned that QE will work and will cause inflation to jump in the coming months, or 2, that QE won’t work and the economy will remain in the doldrums, which is likely to weigh on earnings growth and cause stocks to crash? I tend to think it is the latter. Gold is rallying because the markets are worried the summer rally is over-extended and the growth outlook does not justify the current highs in stocks, which makes the markets vulnerable to a nasty pullback and short sharp shock.
Gold could be a profitable trade if we get a pullback towards the $1,765 zone – the Tenkan line on the daily cloud – targeting $1,810 first then $1,840 – the highs from September last year. Support lies at $1,750 initially then at $1,728.
Gold: daily chart