Bangers & Mash with Dave

David Rosenberg:

RALLY REASONS
The dramatic bounce-back in the equity markets yesterday (with follow-through today) boiled down to several factors:
1. Strong hints from Trichet that the ECB is going to step up to the plate and aggressively support the bond markets of Portugal and Spain.
2. The strong global purchasing managers’ indices, especially the number out of China.
3. Signs that Bernanke is working behind the scenes on Capitol Hill to promote more short-term fiscal stimulus.
4. The strong ADP jobs data.
5. Growing talk that a deal will soon be reached that will extend the Bush tax cuts as well as the emergency jobless benefits.
6. Goldman Sachs’ economics department threw in the towel and substantially raised its GDP forecast for the U.S. for 2011 and 2012.
From my lens, the S&P 500 had become near-term oversold and turned in a classic Fibonacci retracement from the early November highs to the recent lows. Much of what we are seeing is technical, not fundamental.
The ECB can assist in the provision of liquidity, to be sure, but is not equipped to deal with solvency issues. Nothing Trichet does will prevent massive fiscal tightening in much of the Eurozone in the coming year as structural deficits will be addressed.
While China’s PMI was solid (55.2 in November from 54.7 in October), is this really going to be conducive to risk-on trades? After all, if anything, it means the People’s Bank of China (PBOC) has more work to do in coming months with respect to the policy restraint needed to thwart burgeoning inflation pressures. Furthermore, one less-cited piece of information was the price component of the Chinese index, which came in at 73.5 in November from 69.9 the month before.
Yet, there are signs of slowing growth taking hold across large swaths of the emerging market world — real GDP contracted sequentially in Q3 in Singapore, Malaysia, the Philippines and Thailand and was roughly flat in Hong Kong, Korea, Taiwan and Malaysia.

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