One of the triggers of yesterday's late sell-off in risk was an FT article suggesting that China was reviewing its holding of EuroZone assets. Overnight, China issued a broadside rejecting this story and trying to reassure markets that it considers Europe a key market for its investments. The effect of this pronouncement was immediate and large in the world's equity markets and in FX, where the Euro zipped back higher north of 1.2300 after closing yesterday below 1.2200. The commodity currencies rallied even more sharply in response per the usual pattern we have come to expect.
Looking around elsewhere for support for this move, however, and we get a mixed impression at best on whether this rally can hold. First, sovereign spreads within Europe took no heart at all in this rhetoric, thus underlining that the fundamental pressure is still in place at least on the Euro (and therefore supposedly on risk in general per recent patterns) regardless of China's good intentions. Second, German bunds seem to be fairly stable considering moves elsewhere, trading only slightly lower on the day. Other risk measures have improved slightly, but the spreads related to counterparty risk in the banking system are still widening, something that is likely to remain the case as long as the sovereign spreads don't come in.
US Jobless Claims a Downer
The latest weekly jobless claims number out of the US continues to show an amazing stickiness in high claims numbers that suggest the employment situation is not improving at all, even as commentators are tossing around number like 500k for next week's US nonfarm payrolls number. That would actually be one of the highest payrolls gains in the history of the history of the data series. It's interesting to think that the last time we saw particularly high peaks in unemployment in the US, the unemployment rate had fallen by -0.7% by six months after the peak. Here we are six months after the peak and the rate has only dropped -0.3% and jobless claims are still rolling in well above 400k per week. The latter needs to drop way below 400k, and perhaps 350k, for at least two weeks running to expect any real momentum in job recovery. The claims numbers tend to be the leading indicator.
The latest weekly jobless claims number out of the US continues to show an amazing stickiness in high claims numbers that suggest the employment situation is not improving at all, even as commentators are tossing around number like 500k for next week's US nonfarm payrolls number. That would actually be one of the highest payrolls gains in the history of the history of the data series. It's interesting to think that the last time we saw particularly high peaks in unemployment in the US, the unemployment rate had fallen by -0.7% by six months after the peak. Here we are six months after the peak and the rate has only dropped -0.3% and jobless claims are still rolling in well above 400k per week. The latter needs to drop way below 400k, and perhaps 350k, for at least two weeks running to expect any real momentum in job recovery. The claims numbers tend to be the leading indicator.
Chart: USDCAD
Correlations, anyone? The chart of USDCAD (shown as CADUSD in green) shows how this pair has been a pure expression of risk lately, and that markets often dance in lock-step when market volatility accelerates. Looking at the support levels in USDCAD, it would appear that 200-day moving average test in the USDCAD would approximately coincide with the same MA in the S&P500 - so watch the two markets for divergence/confirmation.
Correlations, anyone? The chart of USDCAD (shown as CADUSD in green) shows how this pair has been a pure expression of risk lately, and that markets often dance in lock-step when market volatility accelerates. Looking at the support levels in USDCAD, it would appear that 200-day moving average test in the USDCAD would approximately coincide with the same MA in the S&P500 - so watch the two markets for divergence/confirmation.
Looking ahead
The market is trying to find encouragement from this latest "development", which hardly seems a development at all. But who knows - maybe hot air from China can lift the market balloon for a while. The question for us remains when the pull of gravity is re-established until we see real reason for encouragement. As to whether this rally has shorter or longer term legs, we continue to watch the 200-day moving average in the US S&P500 (just above 1100 on the cash index) as the key indicator. A solid break back higher and maybe we get a few weeks of dithering and attempts to head higher and think that we have the all-clear. The renewed bear potential would seem to be more immediate, however, as long as we're not seeing strong follow-through higher in risk trades in the short term.
The market is trying to find encouragement from this latest "development", which hardly seems a development at all. But who knows - maybe hot air from China can lift the market balloon for a while. The question for us remains when the pull of gravity is re-established until we see real reason for encouragement. As to whether this rally has shorter or longer term legs, we continue to watch the 200-day moving average in the US S&P500 (just above 1100 on the cash index) as the key indicator. A solid break back higher and maybe we get a few weeks of dithering and attempts to head higher and think that we have the all-clear. The renewed bear potential would seem to be more immediate, however, as long as we're not seeing strong follow-through higher in risk trades in the short term.
On the calendar for the rest of the week, we have lots of data out of Japan tonight. Tomorrow we have a look at Norway's May unemployment rate, Sweden's Q1 GDP and Apr. Retail Sales and US Apr. PCE Data, May Chicago PMI, and final May University of Michigan Confidence (the preliminary reading did not show the surge higher seen in the Conference Board number...)
The most important factor in the market tomorrow will inevitably be the end-of-month fixing, which could see unpredictable action (broken correlations, for example) and large trading ranges, especially since May was an extremely volatility month for all major asset classes with significant changes from the month ago levels. Remember that tomorrow's action comes before a three-day weekend in the US.
Stay careful out there
Economic Data Highlights
- New Zealand Apr. Trade Balance out at 656M vs. 455M expected and 590M in Mar.
- Japan Apr. Adjusted Merchandise Trade Balance out at ¥729B vs. ¥688B expected and ¥768B in Mar.
- Australia Q1 Private Capital Expenditure fell -0.2% QoQ vs. +2.5% expected
- Switzerland Q1 Employment Level rose +0.1% YoY vs. -0.1% in Q4
- Sweden Apr. PPI out at -0.2% MoM and -1.0% YoY vs. -0.3%/-1.2% expected, respectively
- UK May CBI Distributive Trades Survey saw volume of sales fall to -18 from +13 in May
- Germany May CPI out at +0.1% MoM and +1.2% YoY as expected
- US Q1 GDP revised to 3.0% vs. 3.4% expected and the original 3.2% estimate
- US Weekly Initial Jobless Claims out at 460k vs. 455k expected and 474k last week
- US Weekly Continuing Claims out at 4607k vs. 4613k expected and 4656k last week
Upcoming Economic Calendar Highlights
- New Zealand Apr. Building Permits (2245)
- UK May GfK Consumer Confidence Survey (2301)
- Japan Apr. Overall Household Spending (2330)
- Japan Apr. Jobless Rate (2330)
- Japan May Tokyo CPI (2330)
- Japan Apr. National CPI (2330)
- Japan Apr. Retail Trade (2350)
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