Markets saw a huge increase in volatility overnight as the news of joint central bank coordination to lower swap rates (the borrowing costs for transactions between financial institutions) hit the wires. The main policy goal was to increase liquidity in the US Dollar and the result was a sharp rally in equity markets and the high yielding currencies during the New York session.
The central banks of the US, Canada, Japan, UK, Switzerland and Eurozone were all involved in reducing these US Dollar liquidity costs by 50 basis points in an attempt to bring some stability back into the asset markets. The EUR/USD rallied 200 pips (reaching highs above 1.35) and the S&P 500 blew through some major psychological resistance levels to trade just below 1250.
The price activity came in conjunction with some positive macro data as well with strong Chicago PMI and ADP employment numbers (suggesting a positive surprise for this week’s Non Farm Payrolls data) and the decision by the Chinese government to lower the Required Reserve Ratio (to help stimulate the ability for banks to draft new loans). The ADP report showed a rise of 206,000, which was well above market expectations and this will lead many analysts to revise higher their estimates for Friday’s Non Farm Payrolls numbers. At the moment, the consensus is expecting a rise of 120,000 new jobs for the month of November.
The question going forward will be for how long this risk rally can continue. Most of the market is short, and it is entirely possible that stop losses in these positions could fuel another run higher. If we continue to see agreeable sessions between the European finance ministry (no political obstacles for the implementation of budget policies), we could see higher ranges in equity markets and the Euro in the near term. The next moves will be significant for end of the year forecasts, as a break of the post-coordination highs will lead to an upward build in momentum.
It must be remembered that the joint central bank decision does not in itself remove the underlying problems present in the Eurozone, so longer term any rallies will continued to be viewed as questionable. The next major event risk for the region will come with the Finance Ministers meeting on December 9th. Shorter term, markets will be looking for a confirmation of the new Non Farm Payrolls expectations. Any downside surprises are likely to create sharp reversals.
The EUR/USD saw some sharp rises in the previous session, so we will pull out to the weekly charts to get a clearer picture of the overall trends. Despite the huge short term price rises, the rally still looks relatively small in the larger picture. The key levels to watch next will be seen at 1.3520 and a break here will accelerate gains, but the longer term picture remains bearish and rallies are expected to be met with selling pressure.
The S&P 500 broke through the critical resistance levels discussed yesterday en route to new highs below 1250. The bounce off of significant Fibonacci support is encouraging for the longer term but we are still viewing this as a sellable rally, given that there are still lower highs on the hourly charts and the MAC is crossing into negative territory. Stop losses should be kept tight, however, because of the strength of the recent impulse move.