Yet another record high for the S&P 500 yesterday risk sentiment remains positive. Durable goods numbers came out for the US as well and ignoring the flashy headline numbers (22.6% up vs 7.5% expected) the less volatile adjustment which excludes defence spending and aircraft orders was actually a mild disappointment (0.5% down vs 0.5% up expected). There was also a slight disappointment with the annual number for the Case-Shiller house price index. Consumer confidence numbers posted an improvement, but I’m always sceptical about how much to read into this as the level of the equity markets certainly influences consumers. But the key point is that money kept coming into the equity markets.
As I said yesterday, there are definite signs that dollar momentum is waning. That said, the euro has made a new low versus the dollar again today, but this has the feel of an endgame in the short term, as traders pile on to position for the ECB’s version of QE, which seemed to be the implication of Draghi’s Jackson Hole contribution. We’ve seen sentiment numbers come out for Germany, France and Italy today with slight declines for all of them (not a huge surprise there!), although it’s worth noting that both the German and Italian numbers were a bit worse than expected, but the French Business Climate number was in line with expectations. All in all, just another confirmation.. if it was needed that all is not well with the Eurozone recovery. While I do anticipate some sort of pullback in the dollar in the next few weeks, I wouldn’t be surprised if the euro underperforms its peers in a bounce. For that reason the odds are that the EUR/GBP bounce has run its course and we’re set for new lows.
While the carry trade has not participated in the risk rally to date, I think the probability of some catch up trading will increase the longer the equity market rally continues. USD/MXN, USD/BRL, USD/INR and USD/KRW are just some of the charts I’ve looked at recently that looked primed to go lower. As the bigger investors come back from their holidays, whether in Lake Como or the Hamptons, the odds are increasing that we see a re-coupling of a trade that has worked so well over the last decade. It’s a decidedly riskier trade than in the past, with pronouncements from central banks likely to have an even bigger impact (if that’s possible), but while the music is still playing why not continue to play the game? Just make sure you get to one of those chairs before the other guy when the music stops. For that reason perhaps the real bet is emerging market currency volatility? Much easier to define your losses!
For the rest of today the data is scarce unless you’re a commodities guy with a specific interest in US energy resource consumption.