5 Questions About Today's News

By now you likely know that markets wholeheartedly endorsed the results from Europe. The S&P 500 climbed 3.4% and European bourses gain 5-6%. It may have been a game changing day but several questions have to be answered before we jump in with both feet.

1) How short was the market?

Certainly a portion of the moves in the market can be attributed to a short squeeze but its impossible to say exactly how much. We know that in last weeks CFTC report, EUR positioning was extremely short. In that sense, the surge seeing the largest gain in EUR/USD since July 1, 2010 makes sense. But it doesnt explain the huge rally in AUD, which was held in a net long position.

2) How will central banks react

We know that central banks around the world are concerned with the European sovereign crisis. If the weekend talks had ended in disaster there is little doubt that both the ECB and RBA would have cut rates next week. Markets are cheering the results of the talks but will central bankers be impressed? Thats the big question to be answered in the week ahead.

3) How was CHF was the top performer?

In a broad rally led by EUR and with European bank shares surging it doesnt make any sense for CHF to be outperforming EUR. Our best guess is that the SNB was unloading some of the billion of euros it has accumulated defending the 1.20 peg.

4) Are consumers really back?

The great mystery of Q32011 is the divergence between what consumers are saying and what theyre doing. Consumer confidence was at an extreme low in Q3 yet consumption in the GDP soared above estimates, adding 1.7 percentage points to growth

Digging deeper, spending on services was a major catalyst, rising at the fastest rate in six years. Healthcare spending added 0.6 pp and household and utilities increased 0.4 pp. Trips to the hospital and higher utility bills dont sound like the basis of an economic recovery.

5) Are companies investing in everything but workers?

The columns in the GDP report for investment in equipment and software and non-residential investment added 1.2 pp and 0.3 pp to GDP. Those numbers point to a boom, a roughly 15% increase in spending in these areas. But if companies are investing so much, why arent they hiring?

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