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All Eyes on the Fed Today |
Gold & Railways Give Markets a Leg Up
Unlike their European and Asian counterparts yesterday, securities
traders were able to overcome the bad earnings figures released by UBS,
which helped trigger the Asian and European equity rout. Major North
American stock exchanges ended the day in the black, with the TSX
posting 1.36% in gains; the S&P500, as well as NASDAQ, also both managed
their way into positive territory by the bell. The Dow Jones Industrial
Average was the laggard of the bunch yesterday, giving up in a minor way
due to a Morgan & Stanley’s rating reduction to “Cautious” for
semiconductor stocks.
The markets were driven mainly by two forces:
gold, and the man that turns everything he touches into gold: Warren
Buffett. The Oracle from Omaha announced yesterday that his company,
Berkshire, was going to buy Burlington Northern. The deal, valued at an
estimated 34 billion USD, makes Burlington Northern the second largest
railroad in the US, more valuable than any railroad on the Monopoly
board (even if you own all four). The railway is the largest hauler of
corn and coal in the US, as well as being a major transporter of
commercial goods such as cars and refrigerators. Buffett is quoted as
describing the purchase as an “all in wager” on the US economy, given
that the railway has made a name for itself hauling a wish list of items
whose demand are an indicator of general economic health. It seems that
Buffett is letting the market know that he thinks demand for all these
items will increase, which in turn will generate growth in the greater
economy.
Gold was the other newsmaker in the day as it
stormed to record highs yesterday (and again this morning). The lustrous
metal cracked $1,086.00 per ounce by the bell on yesterday’s news that
the International Monetary Fund sold a staggering 200 tonnes of gold to
India’s central bank. This also, interestingly, signalled yet another
Asian economy moving away from reserves of US dollars, and just months
after China announced that it had doubled its gold reserves in the last
six years, mainly at the expense of the Greenback; this highlights how
emerging economies are not as heavily reliant on the mighty USD as they
once were.
Expectations for Today are Positive
Currencies have started the North American market day with the
expectation that we will see some good news data out of the US today.
All the majors are up overnight against the USD as global equities rally
and traders position themselves for news that they expect will indicate
that the Americans have pulled out of this recession and that a return
to growth has really begun. Overnight exchanges in Asia and Europe all
posted gains as commodities strengthened on expectations for greater
demand in an environment where the global economy begins its return to
normalcy.
The CAD surged almost 2.5 cents against the
USD in the last 24 hours. Driven by strong equities, record gold prices,
and increased oil prices, the lately-battered Loonie was a darling of
traders yesterday and overnight. And with all the negative news lately,
the CAD has definitely been desperate for a reprieve. BoC Governor
Carney and a string of bad data, including a surprise contraction of the
Canadian economy, has effectively seen the CAD relegated to the
sidelines during multiple risk-on plays over the past couple of weeks.
Today, however, is a new day, and with gold extending its rally from
yesterday up to $1090.00 per ounce at the time of writing, oil holding
above $80.00 a barrel, and the TSX starting the day in positive
territory, the Loonie is looking strong indeed. Positive news from our
neighbour to the south and by far our largest trading partner should
also indicate potential for increased demand for Canadian goods.
The Day in Data
Today is a big data day, with Non-Farm Payrolls out already at a
disappointing -203K versus an expected -188K. This hasn’t seemed to
dampen the spirits of most traders, however, whose gaze today seems to
drift toward bigger fish. And, honestly, it’s not that surprising that
markets have shrugged off poor employment data today: over the last
couple of weeks, traders have been blasé about less-than-impressive
employment data. Still, we can’t stress enough that ignoring the effect
of a weak employment market on the greater economy is a foolish thing to
do.
Next up is the ISM Non-Manufacturing PMI,
expectations of which are for a 51.6 versus the last reading of 50.9.
After that is the “pièce de résistance” of today’s data, the US Federal
Funds Rate announcement and accompanying FOMC statement. Expectations
are for no change in the effectively zero rate, though traders will be
analyzing every syllable in the statement looking for clues as to the
Fed’s state of mind. Markets will respond strongly to any sudden new
sentiment or changes in plans regarding monetary policy and various
government-sponsored stimulus initiatives.
Then, in the afternoon, New Zealand releases
its unemployment rate, which is forecast to be 6.4%, down from the last
reading of 6.0%. Finally, after the bell, the Aussie Trade Balance is
out, and markets are calling for -2.16B. Expect high volatility today as
markets position themselves for each subsequent data release while
digesting the news already released.
Have a great day!
By David Starkey, FX Trader
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