Is Quarter-End and QE2 the Real Driver?

Stocks and commodities surged after Greece voted in favour of austerity measures on Wednesday. NZD, AUD and CAD were the leaders while CHF and USD lagged. We warn that quarter end, the conclusion of QE2 may be distorting markets.

Greece passed the first of two critical austerity votes with 155 votes of the 300-person parliament. They will vote on a second bill Thursday to authorize the specific austerity cuts in greater detail. The initial euro selloff after the vote in Greece looked like an attempt to shake out weak longs but the market was able to regain its footing and closed near the morning highs and the June 22 highs around 1.4450; this level will be an important short-term hurdle.

As impressive as the moves were in the commodity currencies were, none of AUD, NZD or CAD looks technically compelling versus USD. That tends to make us want to stay away from any short-term longs here.

The S&P 500 closed at the highest since June 2. The index has gained at least 1% in each of the past three sessions. Remember that the weekly close on the index on Friday was the lowest since late December. If we can CLOSE THE WEEK around these levels, it would be a large technical boost for stocks and risk appetite. Be mindful, however, that funds may be buying stocks at quarter end in order to report long positions to their investors.

Todays 7yr Treasury sale mirrored weak 2s and 5s earlier in the week and yields once again climbed 5-12 bps. The level of weakness in bonds over the past three days does not correspond to news developments. With QE2 now over, rumours that dealers were buying Treasuries at auction, only to flip them to the Fed are looking much more believable.

The large moves in stocks and bonds are spilling over to forex and we warn that they may be unwound in the next week.

Economic data is second-tier in the Asia-Pacific region with Japans manufacturing PMI as well as housing starts, NZ Business confidence and Australian private sector credit.

Ashrafs LONG OIL TRADE trade despite the SPR release initiated at $91.50 hit its target at $94.70 today. For more trades, see the Premium section: http://ashraflaidi.com/products/sub01/