NFP eye opener, leads to a USD curve ball.

The S&P 500 continued its bull rally last week, adding 2.3% to close above 1000 at 1010.  The equity markets were driven by the financial sector, which climbed by 11.0% for the week.  Monday’s session started with a bang as the equity markets moved quickly out of the starting gate, closing with an excellent first session.  Financials broke out early in the week, led by surprisingly good earnings from European banks such as HSBC and Barclays. AIG and other large caps also helped to drive the sector higher, as the broader market consolidated prior to the NFP result.

The broader market continued its move to the upside closing above 1000 for the first time since October of 2008. During the week the market chopped around as traders prepared for the major market mover- the NFP result.  Similar to the financial sector, the S&P 500 Index broke out at the beginning of the week but then showed lack of movement up until the release of the employment data.  The technology heavy NASD composite market also hit a milestone.  The index breached and closed above 2000 for the first time since September of 2008.

From a technical point of view the NASD Composite held its 400 day moving average, which has turned now into a strong support level, while the S&P500 closed above its neckline showing investors that this could be the beginning of a new bull market.

Nasdaq 100 Composite


 
S&P500 Daily Chart


 

A wave of Data had little effect on movement

Most of the US data showed that the green shoots theory might be holding its own.   Both the manufacturing ISM and construction spending released at the beginning of the week were stronger than expected. July’s manufacturing ISM rose to 48.9 from 44.8 in June, the best showing in 11 months.

New orders came in at 55.3, from 49.2, while Employment improved to 45.6 from 40.7. To add to the market’s optimism, construction spending in the US unexpectedly rose by 0.3%. The news added to recent good results from the housing sector, showing mild improvement. The better than expected result was led by residential construction and government projects.

Despite the good news, not all the data showed an optimistic picture, as US Personal income in June fell 1.3%, slightly more than expected and completely offsets the revised 1.3% gain in May. In addition, the ADP report showed a private sector jobs loss of 371k, exceeding the market’s consensus of 350k. Furthermore, the service ISM fell to 46.4 from 47.0, showing mild weakness. 

Even though the economic calendar was full of events last week, investors brushed aside the data, waiting for the main event of the week.   Non-farm payrolls in the US showed that the economy had lost 247k jobs during the month of July, much lower than analyst’s expectations, while the unemployment rate fell 0.1% to 9.4%. As stated in previous reports, by taking a glance at the chart below one can see that employment data has made an astonishing come-back, something that could drive the equity markets even higher. From a technical point of view the chart has now formed a lower higher, signaling what could be the start of a new trend.


 

Dollar Bounces on Good Data. 

Since the beginning of June the Euro, Australian Dollar and the British Pound vs. the USD have been highly correlated with the S&P 500 Index.  Investors took the view that short dollar positions where in line with greater risk tolerance.  This week that correlation weakened, as the Dollar shot higher on Friday’s NFP result.  The EUR/USD broke out above strong resistance on Monday and held new support levels until Thursday when the dollar began to strengthen.  Friday’s price action shocked traders after the employment report, as the dollar gained strength. This was against conventional wisdom that the dollar would weaken on strong economic news. The following EUR/USD chart shows how the breakout at the start of the week now seems to be a fake out, as EUR/USD failed to hold levels above prior resistance of 1.4300.  It will be important for the EUR/USD to hold the 1.4050 for the trend to say intact.

 

USD/JPY bounces to a two month high.  The USD/JPY failed to hold its 20 day moving average after presenting lackluster sessions for the last 10 trading days.  During Friday’s session the USD had a violent up move breaking through trend line resistance near 96.00 and smashing through the 100 day moving average, near 96.63.  Even though the move forced the USD/JPY out of its secondary downtrend, one should observe the Dollar’s price action this week. As stated above the Dollar rallied on Friday, despite the good data. To assume that a new Dollar trend is starting, further confirmation is required. One must note that a one day rally does not determine a new trend.
 

Will next week’s releases support a New Dollar Trend?

Next week investors will scrutinize a number of events to determine if the new Dollar trend will hold.

• On Tuesday the Bank of Japan will determine the fate of its current low interest rate, along with US productivity, unit labor cost and Wholesale Inventories.
• During Thursday’s session the European Union will release its closely watched GDP data, while the US will release its retail sales and jobless claims. European investors will be anxious to see whether the GDP result will back up Trichet’s recent comments regarding the economic outlook. According to the bank president, the Euro-zone is showing mild improvement and first signs of stability.
• Friday’s session will also have an impact on the intraday movements as the U.S and Euro-zone are scheduled to release their inflation figures.