The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
View from London: Euro Rally Surpasses the Power of Apple Earnings
08/02/2017 2:57 am EST
The U.S. and China fight over North Korea and use trade as a weapon. This makes the euro the default alternative reserve currency, writes Bob Savage, CEO of Track Research in Wednesday commentary from London.
How markets react to news matters–a bull market ignores bearish news and exaggerates the bullish stories.
Sentiment drives the interpretation of economic data and it's not as simple as many would like it to be–measuring surprises and reactions produces strange results sometimes–like today–which might appropriately be called “opposite day” for its rejection of the normal rules. (Of course for the hard core believers it’s January 25 that matters.)
The first case-if unemployment falls, then the economy is doing better and central bankers will think about raising rates.
This logic was turned upside down in New Zealand as the drop in unemployment was ignored as the improvement came at the expense of less labor participation. This is something we see in the U.S. and yet the most important statistic–for the U.S. was glossed over in New Zealand–as wages rose a bit more than expected.
Second point overnight, if a central bank cuts rates this resets the riskless rate and lifts valuations in equities. That didn’t work for the Reserve Bank of India as it cut rates 25bps to 6% today, the first easing since October 2016–as most expected–but the equity market fell anyway.
Third, the U.S. dollar/euro (USD) is lower despite U.S. rates being up and European ones being down. This interest rate support break hasn’t been working for some time.
Fourth, if consumer confidence rises it’s usually because of jobs and money-all sounds inflationary-but in Japan as in the U.S., the deflationary part of this story gets ignored-lower beer prices helped lift the mood in Japan.
Fifth, markets usually care more about equities than forex, but the rally up in the euro has managed to surpass the power of the better Apple (AAPL) earnings Tuesday night.
Behind this shift is the game of geopolitics as the U.S. and China battle over North Korea and use trade as a weapon. This makes the euro the default alternative reserve currency.
All of which leaves many to think that only technicals matter and fundamental analysis just isn’t worth the time. Perhaps, but the charts are always changing and so with it the lines to trade. When you trade on the basis of other people buying faster and more than expected, the mood can swing fast.
Throw in the risk of politic getting better and you have real volatility. The obsession of the market is with the euro with 1.1870 the January 2015 high tested today opening 1.19 barrier and 1.2095 December 31, 2014, as the bigger target.
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