The release of the University of Michigan Consumer Sentiment data on Friday was a welcome bright spot after the week we had and showed that, some how, Americans felt more optimistic about their prospects of employment and the overall economic outlook. But concerns over the Fiscal cliff knocked stocks and other risk assets off their highs on Friday night after a speech by President Obama reinforced the issues surrounding the looming negotiations over the Fiscal cliff saw investors renew their fears.
Chinese data over the weekend was encouraging and suggests that the much anticipated soft landing is being pulled off by authorities in the world’s second largest economy. The trade surplus released showed exports grew 11.6% yoy in October up from 9% at the last print. Imports are only growing at at 2.4% pace down from the 3.1% yoy pace previous. This combination saw the trade surplus grow to $32 billion from $26.85 billion in September. This data is good news and combined with the CPI data we got last week suggests that for the moment the Chinese economy is in a fairly good place and growth of around the 7.5% target for the years is now expected to be achieved.
Naturally this is good news for the global economy, for risk assets and for the Australian dollar but we’ll see this week whether markets want to focus on this good news or the more problematic considerations about the US Fiscal cliff and the enduring European economic woes.
I read a piece over the weekend from Australia’s best Macro Strategist ( besides me of course 
) – Russell Jones to institutional clients titled “Bananas”. Russell wrote (my emphasis):
the German coalition has announced that it will be cutting spending and borrowing in an effort to achieve a balanced budget as early as 2013. Yes, you read that correctly: Germany is tightening fiscal policy further. So much for policy symmetry in the Eurozone. So much for one of the few OECD countries with some “fiscal space” using it for the good of its single currency partners. No, in Berlin’s eyes, budgetary austerity remains the answer to every question both at home and abroad, and no matter that the German economy is itself now tipping back into recession. With the ECB also still dragging its feet on OMTs and the ESM as yet little more than a shell, this is bananas. It is sado-masochistic economics redolent of the worst policy errors of the 1930s.
Russell is so right on this and even though my bent is to ignore the rhetoric and trade the market the reality is that you can not ignore the rhetoric can you because it will move the market.
It continues to be a recipe for economic disaster and is it any wonder why offshore investors continue to favour Australia and the Australian dollar as a receptacle of their reserves. It helps explain also why a nation such as Japan in the state it is in has a ludicrously strong currency of its own.
Stocks
At the close of play European stocks were mixed with the FTSE off 0.11%, the DAX off 0.58% while the CAC rose 0.47%. Madrid was up 0.08%.
In the US the early rally in the S&P 500 to 1391 petered out during/after the Obama speech and the obvious argument coming over the fiscal cliff. On the day the SPX rose 2.34 points or 0.17% to 1380. Over the course of the week the SPX dropped 2.43% for its worst week since the end of June. The Dow was up just 0.03% at the close of Friday for a weekly loss of 2.12% or 278 points. The Wall Street Journal reports that the Dow is now down 3.96% over the last 3 weeks. The NASDAQ rose 0.32% on Friday and was down 2.59% on the week.
Asian stocks were under intense pressure again into the end of the week with the Nikkei down 0.90% to 8757, the Hang Seng fell 0.85%, the Kospi in Korea dropped 0.52% while in Singapore the Straits Times was fell a more benign 0.09%.
Our own All Ords yesterday fell 0.44% on Friday to 4482 and it will be interesting to see in today’s trade whether the better Chinese data or the looming Fiscal Cliff dominates trade. My guess is that Asian and Australian trade focus on our region and thus China buoys trade today.
FX Markets
The Euro’s sell off continues – indeed it is accelerating – and looks to have 1.2600 at least written all over it. Sitting just above 1.27 at the moment the Euro is at a two month low and firmly broken the bottom of the range that it had been trading in during that time. It will bounce at some point but I am firmly of the view that Euro is headed substantially lower as both its own troubles and the emergent US strength – just look at the US and European data flow and you will see the “fundamental reason behind this move.
Techincally for the EUR as you can see above it is slipping lower and 2 of my systems are now short (different parameters). Support is at 1.2600 and then below 1.25 at 1.2472 which is the 61.8% retracement of the recent rally. We could see a bounce at some stage but the overall trend looks to be still pointed lower.
Speaking of lower USDJPY traded down to 79.07 before rallying back a little on Friday night to sit at 79.47 this morning. Even with this recent pullback the trend is still up for this one at the moment and the current pullback has a consolidative feel about it.
On other Global FX markets the AUD continues to stand out head and shoulders above the crowd making a low of 1.0358 which was just above my target of 1.0350. As you can see above it is a messy, trendless market for the AUD at the moment and it looks to me that only a move below the 1.0328/38 region would open up further downside as this is a confluence of a number of technical supports.
Commodities
Crude oil futures had another positive session rising 1.27% to $86.17 BBl, with gold up $5 oz. or 0.29% to $1731. Silver continued to outpace the yellow metal rising 1.11% to $32.66 oz. Copper was lower by 0.61% but my sense is it might do better today with the Chinese data and the Ags were all lower with Soybeans in particular getting pollaxed by the boost in the harvest forecasts which coincided with a break of the bottom of the recent range. At the close of play Soybeans were 3.15% lower and looking weak. Corn was down 0.34% and Wheat off 1.77%.
Datawise The market is going to ebb and flow I think with the expectations and movements in view about the fiscal cliff and any resolution or not. But on the data today we have the release of home loan data in Australia and GDP data from Japan. In France it is Armistice day, in the US Veteran’s day so things might be a little slow over the next 24 hours
Thoughts, comments, queries together with frank and fearless feedback all welcome. I’m happy to answer questions or comments on the comment stream wherever I can. You can also follow us on Twitter @gregorymckenna and @VantageFX
NB: Please note all references to rates above are approximate and should not be used for trade reference.