Before we look at the news, lets quickly review our trades:

The Euro is back below 1.44 as expected and looking bearish and the Pound, as expected has fallen hard after breaking 1.64 support. In terms of the Canadian dollar a break below 1.0200 is bearish and in the Aussie the level is 1.0600. The Aussie looks very over extended at present and if you don't have a position be patient and wait for the break lower. In the Pound Dollar were waiting for signs of a turn up in momentum and will take a swing trade to the long side.

US Data Makes Investors Bullish but for How Long

Investors continue to believe that the US is going to make a swift recovery but the argument is based on sand – lets look at the data over the last few days...

Orders placed with U.S. factories rose in July by the most in four months, boosted by demand for motor vehicles and aircraft. The 2.4 percent increase was more than the median forecast and vehicle orders climbed last month by the most since January 2003. So that's a bullish bit of news..

In addition, ADP Employer Services also said companies added 91,000 workers this month. The key monthly jobs report on Sept. 2 is forecast to show payrolls climbed by 70,000 in August after an increase of 117,000 in July. 70,000? Even 100,000 is not enough to dent unemployment and until we start seeing far better numbers were stuck with unemployment at 9% which is way to high and this will continue to impact on confidence as we saw yesterday.

Yesterday the Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July and was the biggest point drop since October 2008. In addition, yesterday, data also showed U.S. single-family home prices dipped in June from May for the ninth straight month;as foreclosures add more properties to the market, while the jobless rate remains high and strict lending rules curtail sales.

Finally today the Institute for Supply Management-Chicago Inc.’s business barometer fell to 56.5 this month, reaching the lowest reading since November 2009. A level of 50 is the dividing line between expansion and contraction and were not far away from contraction!

Comment

So taking the above data as a whole, where is the indication that the economy is on the verge of sustained growth?

The Fed are concerned and rightly so, as we saw from the recent Fed minutes but there is nothing they can do to get economic growth up quickly. I hear a lot of stock managers talking the economy up and they would of course there selling stock but ask the man in the street how great the economy is and you will get a different view.

We still see the US economy as a long way from recovery and this will mean that stocks will fall and safe haven currencies will rise.

In our view though the real threat to stocks and even the global banking system is the brewing fiscal crisis in Euro zone which is going to come to a head soon and it will be ugly...

Euro Zone – Cracks in the Zone

Euro zone has been out the news recently but its back in it now, with members arguing about Greek debt, a gloomy confidence number and a shift away from interest rate hikes - all these factors will weigh on the Euro. We have of course got a full blown crisis coming as well and with this and a lack on interest rate support, we see the Euro falling hard

Peripheral Euro zone debt worries came back into focus today as Finland proposed that Greece provide collateral in return for more aid. Helsinki's request saw other nations put in similar claims with Austria, the Netherlands, Slovenia and Slovakia all looking to protect themselves.

Meanwhile the European consumer is feeling gloomy and the the consumer index plunged in August by the most since December 2008. An index of executive and consumer sentiment in the single-currency region fell to 98.3 from a revised 103 in July. ECB president Jean-Claude Trichet told an extraordinary meeting of the European Parliament’s economic and monetary affairs committee in Brussels on Monday that “risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September”.

The comment contrasts with Mr Trichet’s last policy statement on August 4th, when he said risks to the inflation outlook were “on the upside”. With the fiscal crisis very much likely to get worse and inflation at just over 2% there is no reason to raise interest rates as we said at the weekend.

Comment

The Euro in view of the above has held up rather well but pops above 1.45 can be sold and a move below 1.44 which has just occurred should now set up a test of 1.42 and then 1.40. If the fiscal crisis gets in full swing, we could even see 1.30.

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