Euro strengthens as Draghi buys bonds and Fed buys time

No September QE3

Today’s five-month high in August ADP of 201K supports our stance that no QE3 will take place this month. The seven-year high in prices paid component of ISM manufacturing presented the energy argument against further monetization of debt for now.

The various U.S. national and regional business surveys have shown stabilization recently, with the services ISM continuing to avoid a double-dip below 50. Services ISM hit a three-month high of 53.7 in August while Philly Fed survey improved to -7.10 in August from June’s -16.6.

We may not see the next meaningful decline in equities until both the manufacturing and services ISMs fall below 50 and extend their fall below 45.0. We mentioned in July that the Leading Economic Indicators index would have to post a monthly decline of 0.6 to 0.7% in order for it to be accompanied with sufficient macroeconomic deterioration and escalating bearishness in equities. Such deterioration may have to wait until Q4, which is a fitting time for markets to demand additional QE from the Fed.

The Fed may have to act at its October meeting, when pre-election market volatility is expected to escalate, especially in the event of a close race presenting the argument that uncertainty equals volatility

About the Author

Ashraf Laidi is chief global strategist at City Index-FX Solutions and author of “Currency Trading & Intermarket Analysis.” His Intermarket Insight appears daily on AshrafLaidi.com.

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