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Market Essentials - You Thought Last Week Was Big...

Last updated 9/9/2012 8:00 PM EST (GMT -5) 0 Comments - Add your comment

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Friday’s equity markets closed slightly higher on Friday as weaker than expected US jobs data increased the chances of the Federal Reserve joining the ECB and China in its recent round of stimulus plans. The USD was sold off as those markets that would benefit by Quantative Easing (Equities, commodities and risk currencies) marched higher.

US Watch

The NFP headline number for August fell short of expectations coming in at 96k new jobs created (vs 120K exp) which if the Fed is looking for that story to fit a stimulus decision that has already been made, as I reported earlier last week, then this week’s FOMC meeting is a mere formality. Even the fall in the Unemployment Rate to 8.1% against the previous month’s uptick to 8.3% had the shine taken off thanks to the lower participation rate. If the Fed were seriously considering QE3 at last month’s FOMC meeting then they must be jumping over themselves to push the button now even if financial and economic conditions are much better now than they were at any other asset purchase program release.

Markets immediately started to price in the Federal Reserve going beyond extending its policy rate guidance into late 2015 to include a more substantial blast of liquidity straight from the printing presses into the asset purchase program. The next few days ahead of the FOMC meeting will see markets form their own opinion and price in what they see should be the appropriate action by the Fed. You get the feeling that the Minutes from the last FOMC meeting has raised the bar quite high on what the market is expecting the US Central Bank to deliver.

EU Watch

Markets are digesting ECB President Draghi’s bond buying extravaganza (OMT) quite well. It seems his ‘Do whatever it takes’ mantra has been a PR success as it still rings in the ears of traders just as clear as it did when he uttered them many weeks back. His targeted plan has provided a back stop for troubled economies to be able to access funds through money markets which has produced some certainty to an economies financial worst case scenario.

Spain has seen a flow of capital bank into its bond markets that has its 10 year bond yields reduce to its lowest levels since early April. This renewed confidence thanks to the ECBs Outright Monetary Transactions’ program (OMT), releases the financial pressures of Spain and delaying the activation of the OMT. If the threat of the OMT just being there is enough to keep the creditors at bay, then this would be a miracle result but with Spain really past the point of no return, it may just delay the full bailout request by a few weeks.

What it has done, and I hope that this rings true in some form, is that it should also create a sense that the European Union is here to stay and for the power brokers to get on with mending the damage and creating a unified future. It is a pipe dream at this stage for the entire region but with certain near term risks eliminated, there a short window of opportunity to leverage off the staunch ECB stance and build some momentum in turning sentiment around.  

AU/Asia Watch

China released data on Sunday that continued to show an economy on the decline. Its Output figures for August came in weaker than expected and would account for the Chinese Governments unveiling its $150+ Billion stimulus infrastructure plans to spin the wheels of domestic demand a little quicker.

Of the three major regions applying stimulus measure, there is a distinct difference when you look at the psyche behind their implementation. The ECB and US are throwing their hands in the air and signalling that they have run out of options (thanks to inaction on a fiscal level) whereas, China is cautious not to over stimulate as they did a few years back. Although Chinas infrastructure plans are there to build the medium to longer term growth we may see a tweaking of its monetary policy in the next months to help support sentiment and push for a Q4 turn around.

Outlook

Today we will see Trade Balance data numbers from the world’s second largest economy which will create some regional volatility with a complete miss in its Import and Export data the biggest risk. Imports last came in at 4.7% with the market now expecting further decrease in demand to 3.5% but with Chinas new stimulus announcements Imports in time should correct. However, exports will probably be the one to watch with last month’s print falling dramatically to 1% with markets looking for a slight rebound to 2.9%. Anything over the 4% will be taken as a clear positive as China needs external demand at this point until its internal plans kick into gear. Either way The Stimulus trade is alive and well with dips in risk markets the order of the day.

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.