Markets Cast Aside Soft US Data

Commodities rallied, stocks gained and major currencies were mostly unchanged on Tuesday despite a sharp fall in US durable goods orders. The euro rebounded after rumblings of a Greek euro exit appeared to be overstated. CHF was once again the top performer and it was followed by GBP, which gained on strong Q1 exports and an OECD report calling for higher interest rates.

Risk aversion kicked higher following the sharp drop in US durable goods orders. The declines were primarily due to a 30% fall in aircraft orders and a 4.9% slide in autos but the readings on other sectors were weak as well. Ex-transportation fell 1.5% and non-defense capital goods orders ex-air fell 2.6% compared to the -2.1% expected. Traders may have cast aside the report on seasonality after the March reading on non-defense capital goods ex-air transport was upwardly revised to +5.4%. There was also talk that Japanese supply disruptions were the primary factor.

We see the report as more evidence of a slowdown in manufacturing rather than something that can be ignored. The market may have been influenced by short covering and bottom picking more so than economic news. Several influential brokers also made positive commodities calls today and that inspired optimism about global growth. Oil climbed nearly $2 to $101/barrel and copper climbed 2.3%. The gains did not spill over into FX where the commodity block was flat. The S&P 500 up 0.3%, snapping three days of losses.

The euro sold off early in US trading but later recovered all its losses. The move showed that traders are clearly looking for headlines to sell the euro. Today it was European Commissioner Maria Damanaki who said Greece might be forced back to the drachma. The knee jerk selling dissipated as traders realized she is the European Commissioner for fisheries not exactly in the loop. The euro also climbed after Fitch said it is not planning a further downgrade to Greek banks.

Other news had little effect. The Feds Kocherlakota said he continues to favour 50 basis points of tightening and the US house price index fell 0.3% in April after a 1.5% decline in March (Exp: -0.5%).

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