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Market Essentials - Running with the Rally

Last updated 6/19/2012 7:14 PM EST (GMT -5) 0 Comments - Add your comment

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Overnight markets posted a sea of green as hopes of a European collaboration to integrate its banking system returns to the headlines, as well as, expectations that the Federal Reserve will be providing a form of stimulus to the world’s largest economy.

EU Watch

Spain’s 12 & 18 month T-bill auction saw the amount on offer being covered but at yields that are not favourable long term. Risk markets were weighed down leading into the auction but as results became apparent, markets seemed relieved as it could have been allot worse. This saw Spain’s 10 year yields eased and stocks found support. This had traders joining the ‘speculation bandwagon’ that are hoping for a string of positive news from Greece, G20, EU leaders and the Fed.  

There has been a flood of market chatter with regards to European developments in the last 24 hours. We see this time and time again only to be let down that nothing eventuates which adds to volatility.

·          Rumours that Greece are close to forming a three-party coalition government that would have a pro EU and bailout mandate.

·          EU leaders apparently devising a blueprint that integrates its banking system.

·          IMF receiving further rescue funding to aid in stability for struggling economies.

US Watch

US data also provided an interesting tale that saw an increase in building permits being requested  but a decline in actual building projects being started. This shows that there is underlying confidence amongst the construction industry that they expect demand to turn the corner medium term but don’t believe that the current environment is right to start these projects. Which is no wonder considering the struggle its own economy is facing let alone the concerns to what is happening across the Atlantic?  

With the Bernanke’s Press conference due out later tonight, the amount of speculation for a form of stimulus has seen the markets factor in at the very least an extension of Operation Twist. The expectations that The Fed will in fact take this action has left the door open for what i call the ‘Disappointment Trade’. This is where markets have bought into the speculation that a certain action will take place. This ends up with the majority of the market positioned one way. This then sees one of two outcomes:

1.        That rumoured action occurs and moves are limited as markets take profits after the fact.

2.        The rumoured action does not occur and markets scurry to get out of the position and the move is exaggerated.

When we relate this back to trading the Fed decision, we can see that this would see a strong sell off on risk assets as traders have to readjust to the outcome.

Outlook

As a trader I look for what the market is factoring in and where the money flows. Even with such a concerning global back drop, we are riding the wave of positive sentiment and I believe most of the market knows is only a short term move.  

As I quoted in my EU Outlook piece yesterday:

“... risks initially to the downside whilst Spain holds its 12 & 18mth debt auction. This shouldn’t provide any new revelations and I expect markets to rally towards the end of the day in short cover trading in anticipation of the Feds meeting tomorrow.”

I believe we can use this same approach for today.  

My warning is that the support for risk appetite at the moment is again based on nothing substantiated. There has been no new development that alters my overall Fundamental view. Any long risk positions should be monitored closely by looking for signs that this rally has peaked. Market players will be doing the same thing.

Economic Events to watch:

2350 JP                 May Bank of Japan Monetary Policy Meeting Minutes

2350 JP                 May Provisional Trade Statistics for the Month

0030 AU               Apr Westpac Indexes of Economic Activity

0100 AU               Jun DEEWR Vacancy Report

0130 AU               1Q Dwelling Unit Commencements

0130 AU               May International Merchandise Imports

0430 JP                 Apr All Industry Index

For more intraday analysis and trade ideas, follow me on twitter @ATaylor_GFT

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About The Author

Andrew Taylor's financial markets career started in 1991 in the interbank FX market,where he worked for one of the largest banks in Australia. Andrew then went on to trade on behalf of some of the biggest global banks, working across five of the world's major financial hubs: Sydney, New York, Singapore, Auckland, and Tokyo.

His more than 20 years of experience spans market borders and asset classes, covering global equities, commodities, options and futures. Andrew's wealth of trading experience and ability to communicate with traders of all levels has put him in demand as a first point of contact for clients and the media alike when seeking information and guidance.