There are two conclusions that have to be drawn. The first one concerns the news background which remains especially “heavy” for risky assets and, to our mind, assumes a further drop in S&P500 to 1040 points, WTI to 70$ and EUR/USD down to 1.25 or lower, in the nearest time. The second conclusion indicates that investors are making a big mistake, optimistically reacting to any insignificant data coming from the US.
FOMC Minutes
After Bernanke’s speech in Jackson Hole many investors started to hope that in the context of the September meeting (21/09) the Fed will announce or at least give a hint about the launch of the new stimulus measures package in the US or expansion of the quantitative easing program. Perhaps, this idea did not manage to soar so much; nevertheless, we can feel that it has still been influencing the trading activity during the last days, thus giving support to the risky assets. Now, however, we should forget about it.
The protocol related to the Fed’s meeting on August 10 has clearly indicated that the Fed’s governors do not have any wish to hurry with another stimulus measures package to support the US economy. Also, in our opinion, the “minutes” indicated that not all governors share the idea of a subsequent easing of the monetary policy in the region.
Namely, such “minutes” can be considered a reason for a further drop in S&P500 and WTI because of the fears connected with the US economy’s development fears. It is important to note that the Fed’s position regarding the fact that no one should overestimate the Fed’s steps in terms of QE program resumption, may be a weighted argument in favor of a subsequent appreciation of the US dollar. Someone might be currently selling EUR/USD not because of the worsening situation with the risk appetite, but rather based on the fact that the Fed on September 21 will not announce another round of QE.
US Data
On Tuesday, another portion of macroeconomic data was released in the US. Surprisingly, many traders considered the data encouraging:
* S&P/CaseShiller housing price index in June appeared to be better that was forecasted (actual 1% m/m and 4.2% y/y)
* Consumer confidence made up 53.5 points in August (forecast 51, previous 50.4 points)
To our mind, this data cannot change the sentiment on the market and force investors to think that the US economy does not have anything to fear now. We should pay more attention to the publication of the Chicago PMI data, which came out with 56.7 points, given the forecast of 57. The most discouraging aspect within Chicago PMI is the drop in the new orders component from 64.6 in July to 55 points in August (the record lows since Autumn 2009) and the decline in employment sub-index from 56.6 points in July to 55 points in August.
By looking at the dynamics of Chicago PMI a number of investors may now be actively selling S&P500, WTI and EUR/USD, taking the release of weak ISM Manufacturing on Wednesday and Nonfarm payrolls on Friday as granted.
Summing up: this and the following week we are expecting S&P500 sinking below 1040 points, WTI quotes drop below 70$/barrel, and 1.2580-1.26 on EUR/USD.
GBP, EUR
In the recent days we have seen quite stable trading in EUR/USD. At some point we could observe attempts playing on the upside. However, the situation with GBP/USD was somewhat different – massive sales and strong decline in the quote rate. Speaking of euro, it seems that investors are hoping that Jean-Claude Trichet, in the context of the press-conference on Thursday, will remain “hawkish” and will refrain from any comments regarding the downside risks for Eurozone economy. We consider these hopes wrong and therefore expecting to get rather strong sales in EUR/USD on Thursday, resulting in euro “reaching” the sterling.
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
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