Home > Uncategorized > 2012/09/07: Draghi + data = equities ecstasy, until US Employment

2012/09/07: Draghi + data = equities ecstasy, until US Employment

© 2012 ROHR International, Inc. All International rights reserved.

Does the Draghi-data confluence create the next extension of the equities beyond critical resistances like 1,440-45 in the lead contract S&P future? Or could this be the next exhaustion in the equities now up against bigger resistances? And the next major primary government bond market rally opportunity as we head through the quarterly futures expiration cycle? More on that below. But first…

The ECB producing a more extensive (both in scope and duration) plan to stabilize the yields of distressed Euro-zone sovereign debtors was indeed a positive step. Even though “the devil is in the details”, the European bond markets have taken it very well. That diminished ‘tail risk’ (of an overt government bond market and ensuing banking failure) has allowed the equities to push-up markedly.

And that is in spite of the fact that there is not yet any sign Spain or Italy will opt in to the new bond support program. There are also other less than impressive aspects of the evolved ECB program for Europe that we revisit below. However, almost needless to say, yesterday’s better-than-expected economic data in the US assisted equities in pushing through recent resistance, aided further by somewhat less-depressed-than-expected economic figures from Europe this morning.

That is up until this morning’s somewhat disappointing US Employment report. It is very clear that anything which brings into question the viability and potential for increased momentum in the US economic recovery is not good; especially in the context of so much general global economic weakness. And in spite of the impressive upsurge in the equities yesterday, they are only headed for the much bigger technical trend thresholds that will decide whether this rally is just getting started, or reaching another near-term exhaustion.

While we will have more to say on that below, for now it is important to note some key limitations that were necessary inclusions in the ECB plan for Europe…

 

 

…such as the limited maturity of the bonds they are empowered to buy, and the fact that all of the purchases can only be made on a ‘sterilized’ basis (i.e. shrinking the money supply to the same degree that euros are spent to buy the distressed bonds.)While the plan does remove the risk of an overt bond market failure, those limitations make it much less stimulative than the bulls would like to believe.

All of that is much as we reviewed in yesterday’s TrendView MARKET ALERT-II, and we refer you to that for the extensive details on what the ECB has proposed, and some of the broader trend considerations in the various asset classes. We encourage you to review it because it also contains hotlinks to the several important ECB press conference papers on the various aspects of the new Euro-zone bond support program.

And importantly beyond even that, it also contains some discussion of ECB President Draghi’s justification for the program during the Q&A portion of the press conference. It is hard to disagree with him once the broader context of current dislocation in Europe is thoroughly reviewed. There are also related links in yesterday’s TrendView MARKET ALERT-II to an excellent editorial team Analysis in the Financial Times from Tuesday. That assesses the ways in which risk and funding had flowed since the beginning of the crisis two years ago. It is appropriately named Convergence in reverse. (i.e. previous Euro-zone financial blessings for peripheral members shifting into burdens.)

However, with all of that already said, it seems more important to review the critical trend evolution for the various markets in the wake of the US Employment report.

General Market Observations

▪ Equities explosive rally was up near some further critical thresholds in both the US and Europe this morning. With the soon to expire September S&P 500 future already above the significant 1,425-28 range, the 1,440.70 reaction high from May 2008 is the next significant threshold this side of the 1,500 area.

1,440.70 was the May 2008 high of the bounce from the March 2008 Bear-Stearns capitulation low, and of course the ‘last hurrah’ rally (interestingly enough on central bank easing enthusiasm) prior to the bear market returning with a vengeance into the October 2008 debacle and early 2009. And while there are some interim resistances at 1,462 and 1,485, the next significant resistance is not until the low-1,500 area highs from late 2007.

And the new high in the DAX has now put it through the 7,194 previous high of this year made back in March. Yet it is only up against more prominent 7,250 resistance for now. It is the case here as well that if it is violated, the next resistances are not until the prominent summer 2011 highs in the 7,400 and 7,600 areas. Obviously a lot will rest with whether the equities can shake off the weak US Employment report influence next week, and exceed those next significant resistance thresholds.

EXTENDED TREND IMPLICATIONS

▪ What does this mean to the other asset classes? The predictable pressure on the primary government bond markets, and finally somewhat more extended pressure on the US dollar as well. And yet, at least the govvies are acting as we would expect by bouncing back markedly from the test of major support. That is consistent with all recent phases of the quarterly expiration rollover activity.

As we suspected this morning for the December Bund future that became lead contract yesterday, counterpoint to equities strength took it below lead contract 141.30-.00 support yesterday to near the next, and far more significant, support in the 140.00-139.60 range. Yet, holding not too far below that area for a couple of hours prior to the US Employment report this morning allowed it to ratchet back up over a full point since the weak data encouraged all the govvies. As we had noted in our earlier analysis this morning, that was going to be very important today for the weekly Close.

Not only is 139.72 the lowest level traded by the September contract (as lead contract back in late June), the overall range was pre-existing major congestion, Fibonacci and long-term moving average (weekly MA-41 and monthly MA-12) support prior to the initial reaction from the major 146.89 high back into the first of June. If it fails, next major supports are not until back in the 135.00 and 133.00 areas, even if there is some interim support in the 137.50-.00 range.

All very critical, and the recovery is reinforced by the December T-note future full point discount to the September contract also leaving it holding down near (and never really quite reaching) heavy congestion, Fibonacci and moving average critical trend support in the 132-00/131-10 area.  Even more important was (and remains) the December Gilt future dropping below the 120.25-.00 area support Tolerance at 119.85, yet also recovering sharply to the mid-120.00 area after the US Employment report.

▪ And on the foreign exchange front, EUR/USD has finally extended its rally to and through the more critical 1.2750 resistance. That opens the door to test higher resistances at 1.2950 area and possibly the 1.3050 area. However, there is some interesting interim resistance as nearby as 1.2860; and at this point it might be more prudent in this more gradual trend to wait and watch some sort of near-term correction back toward the 1.2650-00 area. That near term resistance is also very consistent with the bigger US Dollar Index support in the .8000 area (with a Tolerance to .7915.) Also consistent is the commodity currency front, where AUD/USD sharp recovery of the past couple of sessions is back nearer to its 1.0450-1.0500 resistance once again.

And while October Gold future seems to have recaptured just a bit of its crisis ‘haven’ bid, that seems a bit odd. The equities activity would speak of there being much less of a crisis atmosphere, and the ECB bond buying plan is going to occur on a ‘sterilized’ basis (i.e. no real increase in the overall Euro-zone money supply.) That said, the explosive upside activity would suggest a retest of the more important 1,770-85 range resistance is in order before any new top and subsequent selloff might occur.

Note that the impressive September Copper future recovery has also only put it back up to the heavy congestion, gaps, and failed major weekly UP Break in the 3.65-3.69 range.

Along with the activity in the equities and primary government bond markets, that is a relatively clear indication that the real decision on the economic trend is still pending into next week.

Thanks for your interest.

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