Weekly Review Preview- Stocks, Commodities, Forex: Follow The (Fed's) Money
Likely Market Movers To Watch This Week
For details on these see: WEEKLY KEY MARKET DRIVERS AND IMPLICATIONS: STOCKS, COMMODITIES, FOREX
STOCKS
Note the below chart of the bellwether S&P 500, which is our basic one-stop picture of global equities and risk appetite. Candlesticks to the right of the vertical white line are this past week's action, those to the left are included for context.
S&P 500 DAILY CHART COURTESY AVAFX/MT4 04 SEP25
Equities closed higher this week despite 3 straight losing sessions. Here's how it played out
Monday – stocks rallied
- Royal Bank of Australia's hawkish remarks inspire confidence
- The US National Bureau of Economic Research declared the US recession had ended in June 2009. The NBER defines recessions as 2 or more consecutive periods of negative growth, and was thus correct by that definition, which allows for such a declaration even given the continuing stagnation in virtually every US growth metric like real estate prices, jobs, and consumer spending. Given the continued economic pain in the US the announcement was widely derided as irrelevant, though it provided an excuse to rally.
Tuesday-Thursday stocks fall back from recent resistance
For the next 3 days stocks backed away from the near term resistance as reflected at the 1140 zone on the S&P 500. Reasons included
- The FOMC statement telegraphing more stimulus in the coming months was initially seen as a vote of no confidence in the US recovery
- The Band of England indicating it too may consider more stimulus should the UK economy falter
- EU industrial orders came in lower than expected
- Irish government bond yields hit new highs, as the Irish MoF said that holders of subordinated Anglo-Irish banks bonds would not be getting back all their money. The announcement overrode the positive effects of successful Irish, Greek, and Spanish bond auctions, albeit at unsustainably high rates.
- Lower than expected EU and German PMI surveys
- Another negative reading for Irish GDP as needed austerity spending cuts hamper growth
Friday-stocks rally off near term support
Finally get through the 1125 zone on the S&P 500 to push higher into the 1140s
Key drivers of the move were:
CNBC Interview With David Tepper, Advocate of The ‘Follow The (Fed) Money' Mentality
Tuesday's FOMC statement was initially seen as a no-confidence vote in US growth. This interview appeared to reverse that attitude. Tepper saw the FOMC's statement as implying a highly possible repeat of the 2009 stimulus-fed rally despite slowing growth and poor fundamentals.
Back in 2009, vast reservoirs of newly-created stimulus cash, desperate for yields above those of money funds or quality bonds, flowed into equities on the purported ‘good' news of overall poor results beating even worse expectations.
Tepper said that the FOMC statement in effect put a clear floor on equities in the near term should they falter, and that the Fed's readiness for a new round of quantitative easing now put the odds in favor of further market gains, even in the absence of genuine fundamental improvement.
Tepper gained credibility for this strategy of not fighting the US government when his fund earned $7.5 bln in 2009, a 123% return, mostly from betting on a recovery in battered financial stocks. His strategy was in essence simply to follow the US government's telegraphed moves that it would buy bank stocks to prevent collapse of the US financial sector. Per Tepper:
“Either the economy is going to get better by itself in the next three months…What assets are going to do well? Stocks are going to do well, bonds won't do so well, gold won't do as well,” he said. “Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE.
“Then what's going to do well? Everything, in the near term (though) not bonds
The Dow futures climbed 30 points in the wake of the interview.
Positive News and Data including
- Better than expected German Ifo business sentiment
- August existing home sales and housing starts rose modestly as per expectations
- Relatively successful EU bond sales over the past week
Demand was good, though rates have stayed high and even gone higher in some cases. Of course, the ECB could once again be behind some or all of these too, but we won't know about that for a while.
From a technical perspective, it was a significant week, with the S&P 500's 50 day SMA AND EMA now above their corresponding 200 day SMAs and EMAs, the medium term trend is up until proven otherwise.
The S&P 500 is now closing in on the upper end of its resistance zone around 1170. Barring another big market moving event like this past week's FOMC statement, (like the actually start of the QE itself) we expect stocks to struggle getting past this level for the coming week.
Briefing.com 03sep25
COMMODITIES
The FOMC – supplied plunge in the USD resulting from the coming QE helped push commodities, which are mostly priced in dollars, higher.
- Oil: rallied decisively above $75 to $$76.50 for the first time in over 2 weeks on a combination of rising stocks and a falling USD. This despite US total petroleum inventories being at their highest levels since weekly records began in 1990, per the US Energy Information Administration.
- Gold & Silver: Given that these rise or fall mostly with demand for a hedge against currency depreciation, this was a great week for precious metals, as there was bad news for the long term value both the USD and EUR. The FOMC statement convinced markets new USD printing will begin in the coming months. Continued bank financing troubles in Ireland (but also ongoing in Spain, Portugal, and Greece) as well as spiking PIIGS bond and CDS rates suggest the ECB will at some point need to follow a similar path.
- Soft commodities also moved higher
Oilngold.com 05sep26 h
CURRENCIES
Here's a summary of strongest/weakest currencies for the past week. At first glance there is no clear risk trend here, with both safety and risk currencies at both ends of the list. The unifying theme however, is quite clear – the FOMC's new readiness to flood markets with dollars in a new round of stimulus likely to begin in the coming months.
Strongest
- EUR (euro)
- CHF (Swiss franc)
- AUD (Australian dollar)
- JPY (Japanese yen)
- NZD (New Zealand Dollar
- GBP (British pound)
- CAD (Canadian dollar)
- USD (U.S. dollar)
Weakest
Ramifications of Market Reaction To FOMC Statement
Given that the USD is part of over 70% of all forex trading volume, the impact of the FOMC's new readiness for more Quantitative Easing radiated through forex markets. While QE is not the same thing as money printing and in theory its potentially inflationary effects could be nullified by adroit Fed management, markets correctly see it as potentially gutting the value of the USD. The dollar index plunged 2.6% for the week, as the Fed is the only central bank among the major currencies actively readying for more stimulus.
Thus we saw:
The EUR Soar
This one pair alone accounts for about a third of all forex trade, thus the 2 currencies push each other in opposite directions like children on a seesaw. Thus USD weakness is almost enough by itself to insure EUR strength. That's what happened this past week, despite abundant bad news from Irish banking and sovereign bond / CDS rates, and otherwise tepid EU data. Even the bright spot for the EU, German Ifo, suggested lower performance in the coming months.
Compounding the relative EUR strength vs. the USD were successful debt offerings from Ireland, Greece and Spain. The ability of the PIIGS to get near term financing is the biggest short term threat to the EUR, thus these sales boosted the EUR, which automatically added pressure on the USD. In the past few weeks we've learned that the ECB was actively supporting Irish bond auctions over the past months, and so we've reason to suspect that demand may not be what it appears. The truth won't be clear for a while, so markets went with what they could see and the EUR got some added lift.
JPY Intervention Efforts Largely Nullified
Just over a week after the first BoJ intervention in 6 years and possibly a second one too, and the BoJ has little to show for it, as new USD weakness sent the USDJPY right back down near pre-intervention levels.
USD Bounce Coming?
Given the high expectations for new US QE, the most likely causes of change in current FX trends would be something that undermines that relative USD weakness, either:
- Indications of more QE from other central banks
- Signs of slowing EU, Japanese, or UK growth
- A new bout or anxiety about the EU, specifically, an event that attacks the assumptions underlying the current EUR rally such as something that raises questions about:
- The ECB's ability to continue to provide demand at PIIGS bond sales
- PIIGS long term commitment to austerity – watch for Spain's attempts to pass new austerity measures this coming week
DISCLOSURE & DISCLAIMER: NO POSITIONS, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER
Cliff Wachtel, Chief Analyst, AVAFX
Originally posted here.
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