(Another day older and deeper in debt.)
No surprises from the ECB as they held rates at 1.5% as Trichet ended his reign at the helm of European banking by paying homage to the FONZ: Never admit that you were wrong. The ECB did announce that it was extending its policy of providing liquidity to EUROZONE banks at extremely low rates for a period of 12 and 13 months in an effort to prevent any immediate bank run. Also, the ECB announced that it would buy up to 40 billion euro of covered bonds, but that should not be a big deal for covered bonds are the best collateral so many banks will probably not be running for funding posting the highest rated debt.
The big “surprise” came from the Bank of England, which raised its QE BOND BUYING PROGRAM BY 75 Billion pounds to 275 Billion. The British currency immediately sold off as the BOE was perceived by the market to be getting ahead of the rising risk of recession and insuring that the economy would be flush with liquidity. THE GILTS MADE THE HIGH AT THE EXACT MOMENT OF THE ANNOUNCEMENT AND THEN PROCEEDED TO SPEND THE REST OF THE TRADING SESSION UNDER SELLING PRESSURE AND CLOSING ALMOST ON ITS LOWS. IT SEEMS THAT THE BRITISH DEBT MARKET BELIEVES THAT THE BOE HAS SURRENDERED ITS INFLATION FIGHT AS THE AUSTERITY BUDGET TAKES HOLD OF THE UK ECONOMY.
The British pound spent most of the day rallying as did the FOOTSIE as it seemed British investors reallocated from BONDS to STOCKS. It is important to watch this trade over the next week to see if the GILTS continue down with equities taking a bid. ONE DAY DOES NOT A TREND MAKE BUT WHEN A BANK ANNOUNCEMENT CAUSES A MARKET TO REVERSE, ATTENTION MUST BE PAID. The MPC under Mervyn King believes that the risks to the global economy are very real and as intimated Governor King did his part for the GLOBAL LIQUIDITY INITIATIVE.
Quick Hitter #1: Tomorrow is Unemployment data day for the Canadians and the U.S. The Canadian numbers are released at 6:00 a.m. CST and as the readers of NOTES are well aware ,they can be an indicator of the U.S. report. Last months numbers were softer then expected and led to a sell off in the Canadian dollar. The nonfarm payroll number for Canada is projected to be +15,000 and the rate to hold steady at 7.3%. The most significant aspect will be manufacturing jobs in Ontario to see if the auto industry is picking up, especially as this week’s U.S. auto sales which were much better then expected. It is too early for the recent weakness in the LOONIE to have any kind of impact so this report will stand on its own, with a strong currency as its headwind.
Quick Hitter #2: At 7:30 CST the U.S. releases its unemployment report with the consensus number for nonfarm payrolls to be 65,000 jobs with 105,000 from the private sector and government shedding 40,000. There will be problems with this number though as the VERIZON workers ended their strike and the effects of hurricanes on the East Coast may have an impact. The unemployment rate is expected to hold at 9.1% but if this number were to rise to 9.3% it will be the headline and put pressure on Washington as the election cycle begins to take hold. Average hourly earnings are projected to rise 0.2% and the work week to hold steady.
With the FED in play it is hard to get a handle on the BONDS. If the number is above 150,000 NFP, there should be a rally in the S&Ps, which will lead to the LONG BOND being sold as investors move to reallocate from BONDS TO STOCKS. At a ZERO INTEREST RATE it seems that it is the EQUITY and the DOLLAR that will be most in play, with the EQUITY market being the principal variable to swing the markets. The DOLLAR is difficult here for the first response of higher equities will be the DOLLAR being SOLD as RISK ON takes center stage. If the number is deemed to be an economic positive, the EQUITY rally may initiate some DOLLAR buying. Be patient and see if there is indeed a change in sentiment.
Check the resistance levels on the S&Ps or DOW to verify if resistance is being broken rather than just shorts exiting the market. A sizable downside move in the BONDS on a positive number would probably indicate that buyers are emerging and reallocating away from fixed income. In the METALS it is easy to assume that stronger growth in a ZIRP environment should be a positive, but if so, the industrial metals may well lead. The market is battered by the European crisis and exhausted so have your technicals in hand with close stops to keep the risks low. This is no market in which to be a hero.