Morning Commentary and Analysis

The ISM number was a massive beat, much like the Chicago PMI yesterday.  The actual number was 55.3, against a consensus estimate of 52.0, with the range of estimates from 51.0 to 55.0.  Digging into the leading sub-indexes, the headline number is overstating the strength of the report and could be forecasting weakness some time in the future.  New Orders only improved modestly from 51.0 to 51.6, while inventories jumped over 5 points to 54.1.  New Orders less inventories, a key leading metric, plummeted.

Regardless, this was still a very strong report.  My model had forecasted a modest beat at 52.7, and the p-value for a number greater than 55 was .076.  The 55.3 print was 1.56 standard deviations away from the estimate.  I'm going to have to look into this more deeply, but a cursory examination of other outlying reports shows that they were typically skewed by large increases in inventory.

Needless to say such a strong report was a pleasant surprise for the stock market, particularly when considering the weakness in various regional manufacturing surveys earlier this month.  I nervously went long the Russell futures into its release, but I wasn't quite confident enough to make a weekly options play.

The Euro has broken its channel, so now may be a good time to sell.  As I wrote yesterday, I am no longer  looking for long-term downside until this triangle sorts itself out.  It seems like any time a market is stronger than people think it should be, someone blames the Chinese.

Well in this case, it may be true.  Remember how the Euro was recovering while the Commitment of Traders report showed speculators exiting en masse, and I wondered who the Hell was buying it? That week we also saw Foreign Treasury Holdings drop by one of the largest amounts on record. China seems to be rebalancing its massive currency reserves from Dollars to Euros. The Yuan is pegged to the Dollar, so a strong Euro against the Dollar also means a weak Yuan for Chinese exporters to the Eurozone.

The steepness of the down moves show that the market clearly wants to sell the Euro, but it is being supported by someone out there buying the dips. The result is a large triangle showing a battle between the market and China.  I think for now China wins this one, but should the debt problems spread to countries larger and more important than Greece then they may end up regretting this move and rebalance their reserves away from Europe.  Many central banks have learned the hard way that no one is bigger than the market when attempting currency interventions.

EUR/USD Hourly

Stocks also look poised to make a run for new highs.

Russell 2000 Index Daily