China back on top

Coming into this week the bears had all the momentum. The talk in the markets was how low are we going to go? 1.18 in EURUSD and 1018 in the S&P 500 index were common benchmarks. So much for consensus thinking right? Going into Friday EURUSD is hovering around 1.24 and the S&P 500 has traded back above 1100. With a holiday weekend ahead I’d be surprised if that upward momentum did not carry through for at least one more day.

So what happened that changed things around this week? Europe, Greece and the debt/deficit problems in Spain were the initial focus and little has changed there. Economic reports are being overshadowed at the moment.

What happened this week was China. By its pure size alone anything that happens or is speculated upon regarding China is impacting the markets. Of course over the last few years China has been investing into Europe and because of that they have been accumulating Euro’s. As we all know the Euro was quite a bit stronger a few years ago and one would imagine that their European sovereign fixed income holdings were worth a few more Euros a few years ago as well. Sometime between Tuesday and Wednesday this week a rumor started that China would dump some of these holdings which quickly caught the market’s attention.

What is a trader to do? Sell. The smart play, buy! As I discussed the other day, the US and a few other countries tend to think and act short-term (generally speaking). China (and as I mentioned Dubai and elsewhere) are used to thinking longer-term. To paraphrase China’s reaction “No, we are not selling”.

The markets rebounded, the focus of the markets changed from Europe to China and the doom and gloom had temporarily given way to higher spirits. The most interesting aspect of this whole rumor was the fact that China did publicly come out and deny that they would be selling.

Ok, now what to traders do? China denied the rumor; US Treasury Secretary Geithner’s trip to China and Europe is coming to an end. Post the holiday break (in the UK as well) what will grab the market’s attention? Next week does have a full slate of economic reports including a rate decision from the RBA and the US Payroll report. The prior two Payroll report in the US showed total job creation of +520k jobs in March and April. A continuation of this job creation should offer some leverage to bulls who want to put risk back on while a disappointing report may give bears the upper hand again. Of course it won’t be long before the G20 summit at the end of June starts to grab trader’s attention as the focus will move back to Europe and China. Will the markets focus on the short-term economics or wait for longer-term solutions? Enjoy the weekend for now and tune in to find out later.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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