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Market Essentials - Beware A Frenzied Hopeful Market

Last updated 8/1/2012 7:42 PM EST (GMT -5) 0 Comments - Add your comment

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Overnight markets rode another rally of optimism leading into the FOMC announcement that saw equities, commodities and risk currencies move higher only to be matched by the realities of the Federal Reserve announcing no new stimulatory measures or comments to change our view that Quantative Easing is even close to being used by the Fed.

US Watch

The Fed has taken the ‘grown up’ approach here and given a signal to policy makers that it is time they did their job and address the fiscal issues that continue to repress most sectors of the economy. For too long Central Banks have been saving the leaders from having to make the hard decisions with expensive liquidity injections that only masks the underlying issues as the markets are artificial propped up.

The fact that markets now believe that September’s meeting will be the date that the Fed will unleash another round of Quantative Easing just goes to show how disengaged traders are to how the Fed weighs its options to the current fundamental conditions. The Feds decision and comments today has been an exercise in managing future expectations. Economic data would need to deteriorate further for QE3 to even be considered which if the next round of economic data leading into the September meeting remain weak but not tragic then trading on Easing expectations will again prove to be effortless pickings.

If future economic data remains poor but not abysmal then don’t be surprised if we do not see QE3 until next year, especially leading into the elections. This would actually prove to be a positive for the largest economy as confidence would return based on natural economic forces and not costly artificial injections. If the US did manage to string a few months of positive figures then QE3 would have a much better impact as it would be seen to be assisting an improving market as opposed to being used as a last ditched effort.

EU Watch

The rise in markets prior to the Fed announcement shows just how hungry traders are for Central Bank intervention of any sort. Traders seem a little starry eyed and need to do their homework on what the different scenarios would produce when equated back to the elevated market position. The current levels reflect a market that is expecting the ECB to announce a program to buy struggling economies bonds which in turn would lower their borrowing costs. This in effect kicks the ‘full bailout can’ down the road a bit. For risk assets to take the next leg up the ECB would need to announce something over and above buying bonds which is a big ask just based on President Draghi’s comments last week.

AU/Asia Watch

Today Australia will be unveiling its Trade Balance and Retail Sales for the month of June. Retail sales are expecting to show a slight improvement to 0.7% vs 0.5% in May. This higher forecast is attributed mostly to a government cash splash to low and middle income earners as well as reduced interest rates shifting sentiment to a more affordable feel.

The Trade Balance figures are expected to paint a bleaker picture with export dollars most likely to decline thanks to falling commodity prices and a fair decline in offshore demand through Q2.

Outlook

Sense would have traders looking to fade rallies of risk asset markets leading into the ECB decision (excluding AUD with major external forces currently giving support). Buy the rumour sell the fact trade is still on the table. The one word of caution, which has been proven in the past, is to be aware of a market that is driven by hope and expectation. Its irrational drive can make fading a little more difficult so major resistance points should be used to assist in picking levels.

Economic Events to watch:

Note: Times are in GMT

2350 JP     Jul Monetary Base

0130 AU     Jun Retail Sales

0130 AU     Jun Trade Balance

0830 HK     Jun Retail Sales

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.