US macro – the worst in 2010

The US labor market was stagnant in the first half of the year but now – unexpectedly – shows signs of deterioration. Initial claims for the last week climbed to 500k on top of two previous poor readings and pushed a 4-weeks average to 482,5k. Both numbers are the worst since Dec’09. This obviously is worrying, since given these conditions on the labor market a chance for a relatively brisk recovery doesn’t exist. Talks on more easing from the Fed are bound to surface and the US gov may even offer new stimulus measures. However, the data is clearly negative for equities (and related assets). Should it herald a drop in monthly private employment, the fear factor might be just around the corner.

The data on activity – while carrying less weight, delivered even a bigger negative surprise. The Philly Fed dropped to -7,7 points from 5,1 points in July, while the market awaited a minor improvement. The figure is the worst since July 2009. Both Philly Fed and NY Fed point to a further decline in national ISM, possibly to ca. 50 points. That would mark a serious softening in activity – a part of the US economy which so far was quite strong.

Given such macroeconomic picture a reaction of the equity markets was calm, not to say sanguine. While major indices slid, no key supports were broken. The Dow futures are still above the weekly low of 10180 pts. Technically it is important to close the week above this level, otherwise a sell-off to 9950 or even 9500 is likely. The German DAX30 futures look very interesting. The index did much better than the major Wall Street indices, mostly due to the outstanding performance of German exporters. The index remains in a triangle which is just about to complete. A triangle on the bull market usually is a sign of continuation and such moods could have been justified by the good news from Germany. However, each single higher local low may carry more stop-loses underneath and a negative impulse from the US may spark a dynamic sell-off, should the support line be broken. The latest low is at 6060 points with the resistance at 6387 points.    

EURUSD – mixed reactions

The EURUSD became tricky when it comes to reactions to the US macroeconomic data. Weaker readings prompted gains on the pair, possibly on more speculations about Fed actions. On the other hand, weaker equity markets (also in reaction to the data) work in the opposite direction, due to the risk aversion flows. Consequently, it often becomes the case for the pair to immediately react with a rise and the quickly reverse a course. In these circumstances, one might want to rely even more on the technical picture. And this is in a waiting stance until a key levels of 1,2730/80 (supports) or 1,2900/30 (resistances) are broken. However, with a large black candle on H4 yesterday, fully shadowing a previous large white one (reaching 1,29), a chance for a reversed head and shoulders (looking likely as recently as yesterday) has decreased substantially.      

Events to watch – waiting for a close

The calendar for Friday is virtually empty, not including the Canadian inflation (7.00 ET, 13.00 CET, exp 0,0% m/m and +0,1% m/m for core) relevant only for the CAD investors. Otherwise, one needs to pay attention to the key technical levels and wait for a close of the weekly candles.

Przemysław Kwiecień Chief Economist

Disclaimer, investment risk warning
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