Must we always buy the dip?

Just buy the dip
No news and even bad news (German July IFO released today even worse than expected, for example) is great for risk, it appears, as the buy the dip mentality has taken hold again todaydespite a lack of positive developments save for the ECB’s Nowotny suggesting that “there are arguments in favour of giving the ESM a banking license”, which had the market in a tizzy for a while this morning. The reaction in risk and precious metals in the European session suggest that the market is trying to put back on the QE trade, but it will take more doing to dig equities out of technical trouble, and precious metals have been in a shrinking range for two months now, so the jury is out until we get a bigger move there as well.

The idea of an ESM bank doesn’t have much credibility for now given the lack of political rhetoric on this specific idea, and even if it were implemented, it would merely represent another round of liquidity injections rather than a structural solution. The fragilities of the EU in the near term are more about political risks rather than the technical ways to apply more liquidity – the former must precede the latter to get a lasting (more than a couple of days) reduction in risk spreads. Today shows that it doesn’t take much to get a heavily positioned market to take profits or get squeezed, and perhaps the nearing of the big round 1.2000 number in EURUSD played a part, too. EURGBP buying in the wake of the terrible UK Q2 GDP report was a support for the single currency today as well.

Chart: EURUSD
Spanish and Italian spreads to the core tightened slightly on the day as EURUSD fiddled near crucial 1.2145-1.2160 area resistance. A challenge of 1.2000 and even 1.1900 awaits if this zone stays intact. If the market instead gets squeezed further, we may have a look up at the higher flat-line resistance or even the 55-day moving average eventually.

Horrible UK GDP
The UK GDP dipped a scary -0.7% QoQ in Q2, far worse than the -0.2% projections. The explanations for the number suggested that the record bad weather and the extended holiday due to the Queen’s Jubilee were contributors, but weren’t such things baked into economists’ estimates in the first place? The truth is, there isn’t much to the UK economy in a post global credit and property bubble world. Previous UK austerity measures are biting on overall growth even as the government has begun to step back from the austerity message more recently. The housing market is in danger of further contraction as recent surveys and market activity indicators all point south. The only thing holding the pound up is the EU debt crisis at the moment and the fact that it is a liquid alternative to the single Euro. Better weather and the Olympics might hide a bit of the ongoing weakness in the UK economy in July, but one wonders what is supposed to prop up the country’s economy in the longer run.

Canada House Prices
The latest Canada house prices surveys show June prices seeing the lowest seasonal surge since 2008 (the data is not seasonally adjusted) and new mortgage rules just went into effect recently. This may be the beginning of the end, therefore, of the Canadian housing bubble, which has so far flourished far longer and with greater price increases than those seen in the US. Whether this is the case or whether it is still too early to call a top should become evident in the coming two or three months.

Looking ahead
Bonds sold off quite heavily today and risk appetite is having a go at it again despite the ultimate popular stock Apple computer missing earnings badly yesterday and despite our clearly being within the event horizon of a sovereign debt default for Spain if a new rescue package is not agreed ASAP. We’re three percent off the highs for the cycle in US equities as all of this transpires? It’s more than a bit surreal.

Look out for the RBNZ up late today an hour after the US market closes. US Durable Goods Orders data for June is up tomorrow as are the weekly jobless claims. The next FOMC meeting is next Wednesday.

Economic Data Highlights

• Germany Jul. IFO Business Climate out at 103.3 vs. 104.5 expected and 105.2 in Jun.
• UK Q2 preliminary GDP estimate out at -0.7% QoQ and -0.8% YoY vs. -0.2%/-0.3% expected, respectively and vs. -0.2% YoY in Q1
• UK Jul. CBI Trends Total Orders out at -6 vs. -10 expected and -11 in Jun.
• UK Jul. CBI Business Optimism out at -6 vs. 0 expected and +22 in Jun.
• Canada Jun. Teranet/National Bank Home Price Index rose +1.2% MoM and +5.4% YoY vs.+5.8% YoY in May

Upcoming Economic Calendar Highlights (all times GMT)

• US Jun. New Home Sales (1400)
• US Weekly DoE Crude Oil and Product Inventories (1430)
• New Zealand RBNZ Official Cash Rate (2100)
• Japan Jun. Corporate Service Price Index (2350)