The futures staged an impressive reversal this morning following comments from Mario Draghi who stated that the ECB would do everything in its power to defend the Euro. In response, investors took this as a signal that it was Risk On time and began to get all lathered up. The Euro has rallied against other major currencies and is up more than 1% against the Dollar and the Yen.
In addition, bonds in both Spain and Italy rallied on the news and the yields on their respective 10-year bonds fell by about 35 basis points.
Is this an indication we are approaching an expansion or outright new quantitative easing program? We shall see. One measure we look at to gauge the probability of further easing (outside of employment data, which has come to the forefront in recent weeks) is the change in money supply and the market. On that basis, we doubt that Central Banks (at least in the U.S.) will expand their monetary easing programs in the short-term.
The above graph shows the annualized quarterly change in money supply and the S&P 500, on a weekly basis. This measure lends credence to the argument that we are close to a monetary easing program. However........
......The 13-week rolling average of this measure- which reduces the volatility- shows an annualized change of about 4%. This suggests anemic economic growth and that we are still a ways off from a new quantitative easing program. In addition, if one takes recent data and extrapolates it forward a few weeks, we see that an acceleration of growth in the weekly figures and the 13-week average that goes to about 2%. This is not to suggest that this is a likely outcome, and it fact we would bet it does not. We mention it purely for illustrative purposes, and to show that the data needs to get a lot weaker- at least in our estimation- before the Fed acts.
In any event, the SPY is trading up above $135 in early morning trading. The market may try for the $136.4 level, which is the last swing point on higher volume.
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