Throughout the day the markets have move more towards a pure risk off trade. The chart show an interesting move between the S&P, Gold, and the Australian Dollar. The index has dropped early in the morning and the continued selloff added to the flight, this saw gold follow and later the AUD. It will be interesting to see how this ends in terms of a rebound or selloff into the end of the week.
The negative news, starting with earnings last night, could be bringing out the negative concerns in the markets, couple that with the news from Europe and the Markets weren't off to a good start. The markets shrugged off poor news earlier in the week, this could just be a culmination of all that pessimism or the rally not having the QE velocity to counter the negative news.
The markets have seen the biggest two day rally in over a month and risk commodities have followed suit. This could be a threat to the current strategy should it continue to occur. The news coming out includes earnings reports that are beating and more steps towards Spain taking a bailout. All of this has caused concern based on the positioning of the portfolio, while I am expecting the pop from a bailout; I believe that more negative news is on the horizon. However, the strength of the rally (especially like the past few days we have seen) may prompt some maneuvering around positions in order to limit losses in the shorter term. In these markets event driven movement is always right around the corner.
On Wednesday Chinese GDP will come out, and the question will be answered for a lot of assets classes: Is the economy still in decline or is the push of stimulus turning around the Chinese economy? A lot of the asset classes to watch would be copper, Iron, and the Australian dollar for their obvious roles in a pro growth China. This data could also have a spill-over effect on other markets, showing signs of decreased demand in places such as Europe.
Fundamentals are starting to take their toll on the QE inspired rally and earning season has just kicked off. With earning being revised down this season it will be interesting to see how the ‘beats’ that we have seen with YUM and Alcoa last night will play into the overall marketplace. Look to see if the results are shrugged off as a small beat over a low bar, or if the markets respond with strong rallies. This condition should be watched for the entire earnings season in general. Earnings are one of a few factors that could push the markets higher going into the fiscal cliff talks at the end of the year.
Today is the official start of the ESM, how it will be used, and if there will be any significant announcements in the coming week will determine if the introduction will come with a bang. With the global economies diverging ever more from the markets (due to the use of QE) it will be good to look towards the ESM building up capital in anticipation of any requests. Massive use of this mechanism should also put pressure on the Euro.