KRUGER INSIGHTS TUESDAY, OCTOBER 22, 2013

By: Joel Kruger

UP IN THE AIR – A very stacked economic calendar on Tuesday, and as such, probably not the best day to be establishing any meaningful positions. Clearly the postponed monthly US NFP number will be at the center of everything, and we could see a surge in volatility on the back of the print. The US Dollar has now reached a point where it must decide whether it wants to mount a comeback, or really let go and depreciate further. EUR/USD is testing some major falling trend-line resistance off of the record highs from 2008, and a push towards 1.4000 over the coming days would compromise the integrity of this longer-term downtrend. It is still unclear in my view whether this latest slide in the buck is a risk positive or risk negative reaction. It could easily be argued both ways. On the one side, one could argue that the ability for the US government to come out with a resolution on the debt ceiling, has inspired a fresh wave of confidence and market participants are rotating back into risk assets. On the other side, it could also be argued that this has been a risk negative reaction, with the issues in the US not really being put to rest and only kicked down the road to be dealt with again in a few months. On this rational, market participants have fled from the US Dollar as uncertainty over the fate of the currency escalates.  A bearish reversal day in NZD/USD after the market poked above 0.8500, could be offering a warning sign that the buck is in fact poised for broad recovery on risk off themes, but it is too early to tell.  

CONSIDER THIS – Of course, US equities remain a central focus, with this market showing no signs of let up. The S&P has been recording record highs on a daily basis, and there doesn’t appear to be anything that can stop the momentum. I am on the side that argues the fundamentals are not supportive of such an aggressive move, and the only thing keeping this market elevated is the expectation that Fed policy will remain ultra accommodative well into 2014 without any move towards a taper. So the only way I see real risk to equities pulling back sharply today is (ironically) if the NFP number comes in much better than expected. One interesting scenario would be one in which the employment data is really strong and the US Dollar sells off. This would be even more equity bearish as it would tell the Fed that their key indicator of unemployment is improving, while at the same time, the risks to elevated inflation are on the rise. This would force the Fed into being a little more aggressive with its taper timeline. Of course, this scenario is only one of many that could play out, and the reality is that it would be difficult to see a situation where the number is as expected or worse and the market doesn’t stay well supported on the easy money play. I do however believe that the stock market is due for a major bearish reversal in the days ahead, and am just wondering what catalyst will ultimately fuel this very necessary healthy corrective pullback. Sometimes these catalysts come from the least expected places. Only time will tell.