The markets are finally succumbing to a meaningful pull back after the Dow Jones made six consecutive higher closes followed by yesterday’s indecision.

Now it gets interesting. Was the rally just a function of low summer liquidity, or was there real meat behind the move? A good test will be the severity of the selling today and especially tomorrow (Friday).

Today the Dow Jones is down 1%, with the FTSE finishing down 0.8%.

This morning started with bad economic data from China and has got worse as the day progresses. US PPI came in below estimates at -0.5%. The most worrying data point was the Empire State manufacturing index coming in at 5.1 vs the 18.3 expected. That’s the 2nd lowest level since July 2009.

There have also been some wobbles in the banking sector after JP Morgan Chase produced earnings that smashed estimates. However it didn’t take long for markets to spot that most of the upside came from a reduction in loan loss previsions. Either a sign that JP Morgan are taking on excessive risk or that credit conditions are improving.

Judging by the markets reaction, it seems to be the former.

On the bright side, US unemployment claims came in slightly lower than expected.

Forex Trading Moves

The soft US economic data and general return of the fear trade has put the Japanese yen in the driving seat. The USD/JPY is down 1.10%, approaching support at ¥87.00.

Forex markets are a little disjointed at the moment though, at least in comparison to the recent dominant trends and relationships.

For example, the yen is strong against the US dollar, and very strong against the Aussie dollar which is suffering because of weak Chinese data (AUD/JPY is down nearly 1.6%).

However, the yen is virtually unchanged against the euro, which is surging after new Eurozone entrant, Slovakia approved the European Financial Stability Facility.

The EUR/JPY is unchanged while the EUR/USD is up 1.10%. The closely linked Swiss Franc is also bidding higher, with the USD/CHF coming close to support around 1.0400.

The Financial Fixed Odds update by David Evans, Market Analyst, BetOnMarkets.

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