Sentiment Turns Ugly by Adam Button

The US stock market crumbled on Tuesday, pulling down AUD with it while CHF and gold soared to fresh records. Disappointing US consumption data and signs of worried leaders in Europe were the catalysts. The Australian dollar will remain in focus with upcoming retail sales data.

It was a wild day in markets. It appears as though the debt ceiling debate forced people to wait for the euphoric bounce before piling into risk off trades based on a stalled US economy.

The debt ceiling debate seems like old news as it passed in the Senate and Obama prepares to sign it into law. Signs of a rapid slowdown in the US economy are mounting. US personal spending fell 0.2% in June compared to the +0.2% expected. Personal income was at +0.1% vs. +0.2% expected and there were large downward revisions. Fitch upheld the AAA rating for the US but noted that debt will hit 100% of GDP by the end of 2012 and warned that spending cuts are necessary in the medium term.

Spanish and Italian spreads over Germany hit fresh records after Spanish PM Zapatero delayed his vacation and Italy announced an emergency banking meeting.

The S&P 500 turned negative for the year falling 2.6% today to 1254. Its the first close below the 200-day moving average in nearly two years. Negative technicals were compounded by a fall (and close) below the June lows and the neckline of the head and shoulders top. There have been eight consecutive sessions of selling in the longest losing streak since 2008 and the past five have come on higher than average volume.

CHF hit records against USD, EUR and GBP. AUD was the laggard (AUD/CHF fell 338 pips, or nearly 4%). Gold climbed 2.4% and silver gained 3.7%. Ashrafs article from last week on silver is especially pertinent. Not only has silver climbed, but it hasnt been especially volatile: http://ashraflaidi.com/articles/silver-lining-debt-ceiling-quant-easing.asp

Yields on the 10-year Treasury fell 13 bps to 2.61% -- the lowest since November. Technicals point to a fall toward 2.40% which correlates with further declines in USD/JPY.

Asia-Pacific Preview

Australian retail sales are expected up 0.4% after a 0.6% contraction at 0330 GMT. At the same time, the trade surplus is expected at $2.23B. Chinese services PMI at 0100 GMT. The prior was 57.0.

Its difficult to envision that good news will boost AUD given the content of the RBA decision. Policymakers conceded that the domestic economy is strong but held rates at 4.50% entirely because of offshore worries.