When cheerfulness comes, it comes not as single specie, but in battalion. And Wednesday proved to be just the one. Wednesday also once again proved that markets are totally driven by the macro economic fundamentals. At the end of the last month it looked distinctly that global financial system was on the verge of meltdown and that the global economy was about to implode. But a slew of positive economic news from the advanced economies gave risk takers a trigger to act with risk assets surging. Manufacturing output in China, the United States and Russia accelerated in August, but European factory activity expanded more slowly. However, though the Markit Eurozone Manufacturing PMI for August dropped to 55.1 from 56.7 in July, it was still marking its 11th month above the 50.0 mark, which divides growth from contraction.
Moreover, the housing sector provided some relief to the markets. The Refinance Index increased 2.8 percent from the previous week and is at its highest level since 1 May 2009. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment. If consumers are able to reduce their monthly mortgage payment and increase disposable income through refinancing, it can be a positive for the economy as a whole (creates more consumer spending or allows debtors to pay down personal liabilities like credit cards).
Though the ADP report showed that U.S. private-sector employment declined in August, the key data to watch will be the nonfarm payrolls report on Friday.
The soothing economic data of the world's two largest economies revived investor confidence and led to a jump in world stock and commodity prices, reassuring investors after a gloomy August. Treasuries suffered broad-based losses as investors were seen shifting money in the equities and risky assets, sapping demand for safe assets. The benchmark 10-year Treasury note was up by 11 basis points to 2.580%. The 30-year bond yield was up 13 basis points to 3.652%.
The VIX volatility index, which is prone to violent, brief spikes, has marched lower, indicating lower volatility with Dow Jones gaining 0.05%, while the European stocks, Stoxx Europe 600 index advanced 2.7%. The VIX index declined 8.29% Wednesday to decline from 26.05 on Monday to 23.89 yesterday, suggesting a bullish day for the risky assets and equities. Dow Jones Futures are looking directionless, roughly flat to a tinge lower, down 38 points suggesting not much snap back form yesterday rally, though there though there's a few pieces of economic data coming today which may help sketch out a path for markets. Though currently trading in red, some gains may be witnessed later in the day.
However, how long will this gains be sustained is a question that lies ahead. A wave of economic data lies ahead in the day. Acting as a hurdle in the current rally could be the US payrolls data tomorrow. Although the ADP jobs report revealed a surprise 10k decline, the employment component of the ISM manufacturing survey strengthened to 60.4, suggesting an improvement in August manufacturing payrolls. Ahead of the payrolls release the US data slate today largely consists of second tier releases including July pending home sales, August chain store sales, weekly jobless claims, and factory orders.
From the Euro Zone as well, a number of number of data lie ahead, though the primary focus of attention will the ECB monetary policy meet. Though there will be no bond auction witnessed today from the euro Zone front, ECB is scheduled to announce its latest policy decision. Impressive German growth isn't likely to provide much comfort to European Central Bank policy makers today, as a wave of sovereign-debt-related worries has once again swept the continent's financial markets.
The positive data yesterday, prompted investors to reduce their dollar holdings and buy risky assets like commodities, and equities. Both the Japanese yen and USD came under pressure. The Euro strengthened gradually as equity markets picked up strength. The Euro/USD pair witnessed a broad based movement hovering between the 1.2664 to 1.2856 levels. After starting at 1.2675 Wednesday the pair hit a 2-week high level of 1.2856, before closing the day at 1.2795. Currently quoting at 1.2794, slightly lower from the opening quote of 1.2795, the pair has already reached a high of 1.2814. The Euro/USD is looking bullish for the day, with, strong upside likely to seen today. The support is in 1.2800 area the pair will be seen testing the 1.2895 level and will also trigger the 1.2900 during the trading session.
The US dollar index is currently quoting at 82.555, higher from the opening price of 82.595. Though currently seen in green territory, the index will be seen changing the complexion into red, and further downside will be witnessed. The dollar index will be seen testing the 81 area in the day. Once again it will be day of broad based movement in the pair, as both slew of important Economic data and ECB meets lies ahead.
Due to high-risk appetite in the market, gold, the safe heaven as its trading marginally low from its two-month top hit on Wednesday. Comex gold futures closed slightly lower Wednesday on a profit-taking pullback after hitting another fresh two-month high early on. A rallying U.S. stock market amid some better risk appetite among investors did pull some buying interest away from gold Wednesday. December gold last traded down $3.90 an ounce at $1,246.40. Spot gold was last quoted down $2.90 at $1,245.25. Currently quoting at $1246.7, not much buying will be witnessed today in gold as risky markets stand bullish for the day.