Markets positioning for another round of QE from the Fed
One can wonder how stocks are able to keep on the bid in these times of turmoil. The formula has been, since the policy makers are losing the interest rate as a weapon of choice, to rely on monetary support from the independent central banks. The cost of this action not very transparent and could be a double-edged sword for the economies if signs of real growth are not visible. Spain in recession and a downgraded banking sector does not improve the outlook.US job report on Friday to be key.
Last Friday, the US growth figures revealed an economy that slowed more than expected. Advanced GDP for Q1 came out at 2.2% vs. 2.5% expected. At the same time, the personal consumption expenditures showed an 0.8 percentage point increase to 2.1% as expected. This puts the Federal Reserve in a limbo as an increasing inflation is not very welcomed in times of a weakening growth. Reason is that if inflation gets out of hand, then at some point in time, the Fed would have to start hiking rates which would put a damper on economic growth. For now, the markets are acting as another round of quantitative easing will be introduced since the bidding in stocks generally remains heavy.
Using the S&P 500 as measure for risk, in the past 17 weeks, only 3 of them has been negative. The question is now if the saying “sell in May and walk away” will be the theme? Friday’s March job report in the US will be very interesting as we have seen the trend turn a bit in the weekly claims. The nonfarm payrolls are expected to come out at 165K vs. 120K prior and the unemployment rate is expected unchanged at 8.2%. The question is how the market will value the figure relative to QE, meaning basically that the consequence of a figure that deviates from expectations currently is ambiguous.
In Spain, following the downgrade of the sovereign debt on Friday, this week has so far revealed an economy in recession and 16 banks downgraded by S&P, including BBVA and Santander. The Spanish PM Rajoy is facing tough times and has to be extremely strict in balancing the requirements from the ECB and at the same time take keep the Spanish population content.
Last week, IMM data showed a net flow in favour of a lower EUR/USD and should risk aversion pick up, this should also be the case. On the technical side, EUR/USD has found resistance on 38.2% Fibonacci resistance in the wave from 1.4247-1.2625 which has been pivotal throughout 2012. Above that, trend line resistance in coming in from August 2011, currently just above the 1.33-figure. Current support at the 50-day moving average at 1.3215, where a break will open up for a test of the 100-day moving average, currently at 1.3117.
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