Brave New World

US GDP data rekindles risk appetite 29/10/2009

Risk appetite has returned, with a vengeance following this morning’s better than expected US GDP figures. The US economy grew by 3.5% on an annualised basis in the third quarter of 2009, higher than the market expectation of 3.2%. This is the first positive GDP number Q2 of 2008. As expected, risk appetite improved with the expected rise in US equities, a fall in government bonds and a sell-off in the US Dollar.

All of this was expected, and as I began writing this post it looked as though the rally would be short-lived. The GDP growth look less impressive given that much of it has relied on “stimulus-driven gains in consumer and home building“. On that basis it would be reasonable to expect a buy-the-rumour, sell-the-fact type of reaction in the market, with the USD recouping its losses and equities drifiting lower. I’m glad I didn’t place any trades. Barring the Japanese Yen, all other G10 currencies have kept hold of their gains. In particular, the British Pound has had a stellar morning, jumping over 100 pips since the GDP figures- apparently on the back of strong buying from the Middle East. Earlier, positive mortgage approvals numbers from the UK gave investors confidence that the UK economy may be on the turn.

One of the purest gauges of risk appetite in the FX market is AUDJPY. Since the US growth numbers were announced the pair has risen from 82 to 83.27 (as of 10.51 ET). The Aussie appears to have found its footing again after a few nervous days of risk aversion and concerns about the health of the Australian banking sector.

Overall though, the mood is nervous, with a much higher VIX (volatility index) and some technicals showing the market at a crossroads. The jury is still very much out on whether we are at the start of a sustainable recovery. Macro Man sums it up