Fresh four-year highs in monthly US building permits and housing starts at 894K and 872K respectively, are consistent with the 43% and 36% increase in US existing home sales and new home sales from their respective 2010 lows.
“Good” US data no longer disappoints markets on the fear of
discontinuing QE due to the Fed’s insistence to target further declines
in unemployment (towards 7%) regardless of the trend in non-inflation
macro data. The seemingly win-win reaction function between data
releases and market performance works in providing buying on-the-dips at
key support levels (illustrated below) as well as the testing and
eventual breach of this year’s highs.
Cross-market correlations continue to take precedence over individual fundamental factors in the functioning of equity, currency and commodity markets. The risk-on/risk-off dynamics, whereby risk currencies (ex-USD & ex-JPY) move in tandem with equity indices and most commodities,
are most accentuated when event-risk is either omni-present (looming
credit downgrade, eurozone bailout, central bank decision), or
thoroughly out of the headline (Draghi’s OMT & Fed’s QE3
A most recent example of the aforementioned correlations is the
synchronized pullbacks and rebounds along the June trendline support in
equity indices, individual shares, energy and metals.
Determining the causality, or the independent variable initiating the
moves is usually the most challenging part of applying Intermarket
dynamics, but the recurrent support levels in large/liquid markets such
as EUR/USD (24% of +$5trillion /day FX
market) and the S&P500 (followed by over $1 trillion in benchmark
funds) can be used as a leading signal to help confirm moves or warn of
false turns in other markets.
Our positive stance on overall risk appetite throughout the second half
of Q3 and the insistence for EUR/USD to visit $1.35 before $1.25 and for
US crude to retest $96.00/barrel before $85.00/barrel is integral to
the aforementioned set-up. Falling volatility in the VIX and EUR/USD
one-month option volatility is fundamentally backed by traders’
unwillingness to buy volatility ahead of a looming policy freight train
from the ECB and the Fed’s open-ended QE.