Wednesday, October 27, 2010

Durable Goods Report Day-Review

The selloff overnight in the ES was initially sparked by disinflationary news out of Australia, lessening the chances for another rate hike. The dollar broked out above the previous high. However, there is another largely unnoticed story that deserves attention.  The current rally that began September 1 has largely been based on liquidity expectations vis-a-vis the Fed’s much vaunted QE2 program expected to be announced next Wednesday.  Expectations have likely become overdone, however, and overnight, the WSJ confirmed that the Fed’s plan will likely come in on the low end of estimates–around $500 billion.  Accordingly, there is a sell-the-news risk between now and next Wednesday.

The S&P 500  paired earlier losses and closed down 0.3 per cent after dropping more than 1 per cent earlier in the session.

Marginally supportive third-quarter results struggled to counteract the negative influence of a strengthening buck, but as the dollar’s rise faltered slightly, shares pared their losses.

A weak underlying reading for September US durable goods orders further weighed on sentiment, and better-than-expected new homes sales for last month provided little support.

The dollar’s new-found rigidity may be the result of short-covering as those who have been selling the currency take profits. But it may also reflect a reduction in the amount of quantitative easing that is expected to be revealed by the Fed in a week’s time

The Wall Street Journal said the Fed’s QE2 would see about $200bn of Treasury purchases, spread over several months, much less than the $500bn to $1,000bn Wall Street was hoping for.

This is important because many investors believed it was the promise of QE2 that was the main reason for the dollar’s stumble and the S&P 500’s concomitant 13 per cent advance since the start of September

Traders may also have been getting more wary about the political fallout from the Fed’s mooted move. Cheap money from the US was being increasingly blamed by trade partners for distorting the global financial system.

The amount of dollars being issued by the US is “out of control” and this is leading to an “attack” of imported inflation, Communist China’s commerce minister was reported as saying on Tuesday

An International Energy Agency official told an oil conference in Singapore that QE2 may lead to a commodities price surge that “could derail [economic] recovery”.

US bulls may like it, but clearly not everyone is enamoured of the QE2. And is it possible that such comments could be influencing Mr Bernanke to go easy? Probably not, as he is under pressure from the Republicans to keep the money supply going.

1 comment:

  1. Excellent point on Wednesday's high volume double bottom -- I tend to scalp LVN's and sometimes forget to watch volume closely. Looking back over my last few trades it would have definitely added to my trading plan by increasing my size on those higher volume bounce areas. Also -- been hearing talk of QE of $2 trillion + ... market bound to be disappointed ... may have started today.