This is volatility, animal spirits—pick your label

Outlook:

Data doesn’t matter much when the focus is on institutional factors like central bank policy changes and incendiary comments for top officials—unless it’s wildly big data, like yesterday’s jobless claims drop. Then folks sit up and take notice. When we get a wild rally in everything, as we did yesterday, it often ends in tears when the reality check hits, as we are seeing today. This is volatility, animal spirits—pick your label. It’s not “real” in the sense that it reflects sober analysis.

Take Europe. Yes, we know real economic outcomes (like today‘s falling Italian industrial production or rising nonperforming Spanish loans) threaten the current happiness with the end of the debt crisis—but real economic analysis is not the basis on which traders move the market. The euro was always going to slip and slide near the previous high. Italian industrial production is just the excuse. The extent of the move is a function of overdone animal spirits that took the euro up to nearly 1.3400 from 1.2043 only last July and 1.2662 only last November. Chartists say the euro was overbought and ripe for a pullback. When the pullback is over, traders will return to the realization that the debt crisis is over and the euro will rebound. Figuring out the exact timing and extent of these moves is tricky, but that’s the general overview.

We are discouraged by the dollar seeming to come back when the budget problem is so severe—but remember, it’s not the dollar being bought for its own sake, it’s other currencies being sold for theirs. It won’t last. Remember that Monday is a holiday in the US. We will want to go square into the long weekend but with a bias to buy currencies (and sell dollars).