US Economy Faces A Setback After Friday's NFP Release

The U.S. economy and the labour market faced a set back after the release of the latest employment figures on Friday which has seen the chances of further stimulus from the Federal Reserve increase dramatically. As a result, Treasurys, equity markets and precious metals all rose.

Bernanke has consistently hinted at further easing if the labour market does not improve and the latest figures may just be the trigger that he requires to move ahead with QE3. Only 96,000 jobs were added in August compared to analyst expectations of a 130,000 gain and much lower than the revised 141,000 in July.

Will the Federal Reserve now move to introduce QE3 at the next FOMC meeting this week? We still think not but concede that the chances of them doing so has now increased significantly. The euro opens the week above 1.2800.

The spotlight is increasingly shining on the state of the affairs in the United States as the presidential election looms and the European Central Bank finally gave the market some details of its proposed bond buying programme last week. The Managing Director of the International Monetary Fund, Christine Lagarde, has warned leaders at the Asia Pacific Economic Coop-eration (APEC) Summit in Vladivostok, that the U.S. "fiscal cliff" and the possible automatic spending cuts of more than $480 billion is one of three key risks that the global economy faces today.

She identified the other two key risks as the European debt crisis and medium-term public financing. On a positive note, Lagarde signalled the IMF's support for the ECB's bond buying programme. Although rising with the rest of the majors, the Australian dollar has underperformed to open the week at 1.0360.

U.S. share markets gained last week as stimulus speculation rose on the back of weaker than expected employment data from the U.S. and the ECB moved to outline its proposed bond buying programme. The S&P 500 closed at its highest levels since 2008 after adding 2.2% for the week to 1,438. The index is now within 10% of its all time high in October 2007.

Shares in companies such as Bank of America and JPMorgan Chase gained almost 6% in the week. European stocks were also higher on the last session of the week with the DAX gaining 0.66% while the FTSE rose 0.3%. This week sees the German Consti-tutional Court ruling on the legality of the ESM.

Commodities gained a significant boost in response to the increased chances of further stimulus from the Federal Reserve after the release of weaker than expected U.S. nonfarm payroll figures. The CRB index gained 2.78 points to 311.67. WTI crude has gained almost 1% to $96.42 and is now almost 25% higher than the year's low of $77.69 reached on June 28.

Precious metals were the biggest beneficiary of the weak jobs data saw gold surge more than 2% to above $1,740 while silver sky rocketed more than 3% to $33.70. Soft commodities were mixed while copper recorded significant gains of over 3.6%.

GOLD
We unfortunately incurred a loss trading gold on Friday. After having sold gold at $1,705, it fell below $1,690 almost immediately where we could have taken profits on an intraday basis. However, we had entered into this position in support of our view that QE3 will not happen this quarter and is unlikely to happen this year. However, the release of worse than expected employment data out of the U.S. torpedoed this view as investors rushed to price in imminent stimulus from the Fed.

Gold, being a hedge to inflation, was one of the major beneficiaries of the weaker than expected U.S. data and we were stopped out of our position at $1,722. Gold traded a massive $1,690 to $1,7430 range. Although the chances of QE3 have clearly risen we still do not believe that the Federal Reserve has enough justification to move yet. It will continue to monitor the situation in Europe as there is some chance that the latest ECB programme may finally halt the European debt crisis.

Compass Direction
Short-Term Medium-Term
BEARISH BEARISH


AUD/USD continued its recovery into the US payroll numbers as expectations grew for a QE result if the numbers were to be disappointing. Australian Trade Balance numbers we slightly down on the expected but this didn’t seem to cause any long lasting concerns. The focus was clearly on the employment figure.

The Asian session broke above 1.0300 tripped a round of stop hunting that took the pair into the mid-1.03’s before the weak US payrolls result added to the QE hype and equities rallying and the old link to the AUD kicked in, taking the price 1.0400 offers. These offers were enough to cap the move and this is where the pair closed out the week. Weaker Manufacturing numbers out of China on Sunday has seen the price open the new week slightly lower at 1.0365.

Australian Home Loans data is the highlight for locals with China Trade Balance likely to cause some movement. 18.9B is expected with last months 25.1B looking very unlikely. Should this expectations be correct, the AUD will fall along with commodities.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH


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