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The Bigger Picture and Some Intermarket Analysis
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The Bigger Picture and Some Intermarket AnalysisEconomic data was the talk of the town last week, as the Fed released its widely watched interest rate decision and Europe showed surprisingly good GDP results. The week continued on Last Friday’s momentum and dropped despite improving employment data. Even though the first two trading days were characterized by profit taking, prior to the Fed’s rate decision, the market managed to hold above critical support levels.
On Wednesday the Fed released its awaited decision, leaving its fund rate at a low of 0.25%. Even though a “no change” release, was expected by investors, eyes focused on the Fed’s comments, regarding their future monetary policy. According to recent economic data the U.S economy is now showing signs of improvement, but consumer spending is still in dire straits. Analysts now fear that the amount of money in the system, together with such a high deficit could spark inflationary pressures. This has caused the Fed to purchase assets at the longer end of the curve to bring down market expectations. According to the recent comments the Fed intends to keep its rates at low levels for an extended period of time and hinted that monetary easing through interest rates might have now come to an end. Bernanke touched on inflation in his comments stating that while oil prices have climbed, inflation should be countered by the current slowdown, which should ease the pressure.
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
From a technical point of view crude oil has increased dramatically due to a low Dollar, but has now encountered strong resistance at its 200 weekly moving average. Despite the strong increase over the last couple of months, dying momentum could spark equity buying, especially as futures are pricing in only a minor change in the near future.
Light Crude Oil
As stated above, the Fed eased up on its asset program and mentioned that it is going to continue purchasing only $1.25 trillion in mortgage-backed securities and other debts from housing giants. Even though the Fed’s decision sparked an intraday rally on Wednesday, Friday’s CPI result depressed investor’s confidence, driving the indices back lower.
The Fed isn’t concerned about inflation; will the indices climb higher despite mixed data?One must note that even though economic data is showing a mixed picture, certain economic results will tend to lag behind, as the markets climb higher. By taking a glance at the following chart, one can see that the unemployment result in the U.S only topped out during 2004. The Dow Jones Industrial Average was already in its second phase after climbing dramatically higher.
Furthermore, if technical analysis is based on prior price movements, could the current bull rally climb to the 2003-2004’s target, despite the rising unemployment rate, as experienced in the past?
Dow Jones Industrial – Monthly Chart
Currencies Could be Pausing on Their Way UpEconomic data from Europe also had a major affect on the markets last week as two of the leading economies both showed a dramatic change in economic growth. France and Germany both surprised analysts with their GDP figures, showing a 0.3% increase in the second quarter.
As one can see on the chart above that the result improved dramatically compared to the first quarter’s result, presenting a positive number for the first time in over a year. Even though traders were pleased with the result, one must remember that these two economies are only two members of the Euro-zone. Economies such as Spain and Italy are still dealing with declining growth, while others are in a far worse situation. Over the past year the ECB has kept its central rate at a high of 1%, compared to other economies, such as England, which have engaged numerous times in quantitative easing. This has caused a major divergence in economic growth among Euro-zone members. Furthermore certain countries are still dealing with additional problems in their financial structure, due to high interest rate. All in all, while the Euro-zone is showing recent improvement, various economies could prevent the region from a full and immediate recovery, weighing on the Euro pairs.
Despite the fundamentals, when taking a glance at the previous cycle one can see the price movement of the Euro and the Pound. Even though economic data didn’t bottom out until mid 2003 as shown above, currency pairs presented dramatic rallies, coinciding with the U.S stock market.
Will the same correlation continue?When observing recent price action along with fundamental data one can see that even though economic data is just now presenting signs of a turnaround, the major indices along with major currency pairs have been rallying for quite a while. With the U.S running up an enormous trade deficit and the situation of their economy still not at full speed, other economies with lower deficits could attract money and drive Dollar counterparts to higher ground. Furthermore, if the currencies are rallying while fundamental data is still gloomy, what will happen once all the data turns positive?
Dollar Index
For further chart analysis on individual pairs, feel free to visit our chart analysis page
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