The S&P 500 fell 1.3% on a forex related move, after EUR/USD traded down to an eleven-month low.

Among the major averages, the Dow Jones Industrial Average fell 1.1% to 12151. The S&P pulled back 1.3% to 1249, below its 200-day moving average, while the NASDAQ dropped 1.1% to 2267.

Traders seem to be blaming the move lower in risk assets on the news that the ECB's balance sheet had hit a new era-high level of €2.73 trillion, an increase of €239 billion, and €553 billion more than it was three months ago.

This really should not surprise anyone who watches the ECB closely in any shape or form given the take-up of around €200 billion of new money that banks borrowed at the recent ECB LTRO.

However, the price action in EUR/USD and the euro crosses suggests otherwise, and for us, the bigger story is still the huge amount of cash sitting with the ECB in its overnight facility earning 25 basis points, effectively losing 75 basis points from any money borrowed in last week's tender.

On the announcement (around 1.10am), EUR/USD dropped like a stone from 1.3064 to 1.2912, a move of 1.1%, although from all accounts the order books in the physical market were non-existent. EUR/JPY printed 100.73, the lowest level since 2001, while EUR/AUD made a new all-time low of 1.2772 and remains one of our favourite short trades for 2012. As we have seen time and time again throughout 2011, when EUR/USD falls, so does equities, and so does gold, with traders buying into fixed income assets.

Interestingly, the German one-year bund has a negative yield. This means bond holders are paying for the right for someone to look after their money for one year; always a worrying sign!

Despite a healthy short-dated bill and bond auction in Italy, the fall in risk assets has provided our local market with a negative lead, and it looks as though an open in the mid 4000's is on the cards. How we trade after the unwind is anyone's guess, especially if we replicate yesterday's value of $1.9 billion, effectively 35% of the 2011 average!

As you can see from the morning prices, the moves in commodities from yesterday's cash close does not really help matters. However it is worth looking at the technicals on a bottom-up level today as we are approaching key support on a number of heavyweight stocks.

BHP, for example, is expected to open at $34.15 (according to its ADR), which is not a million miles away from $34.10 (October 20 low), $33.85 (November 25 low) or $33.75 (October 4 low). The lows on November 25 and October 4 are especially interesting, given BHP rallied 10.7% and 18.5% respectively from these levels. Given BHP's 12% weight on the market, technical buying should support the broader index.

Newcrest looks set to open around $30.34 (the ADR is not always a very accurate predictor though), which is just over 1% away from December 20 low. Gold looks terrible on the charts and it will be interesting to see if it holds the September 26 low of $1532. A closing break here could see a sharp pick up in shorts, despite gold having a strong fundamental story.

For those who follow RSI's (Relative Strength Index), Billabong and JB Hi-Fi have the lowest in the ASX 200, on 19, which could indicate they are oversold and are due a bounce.

All-in-all it's hard to see any real love for cyclical or risk-associated stocks, and like yesterday it will be the high dividend, low beta names that outperform. As mentioned, there may be a few technical traders who see opportunities in stocks, and with volumes the way they are, these levels may get tested sooner, rather than later. There is no economic data to focus on, with eyes of traders falling sharply again on Italy as it tries to tap the market for up to €8 billion of three-, seven- and ten-year bonds. This is the real test, as last night's auction was short-dated paper; will the banks go for longer and therefore more risky debt?


Price at 8:30am AEST

Change Since Australian Market Close

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Japan 225 (cash)




Rio Tinto Plc (London)




BHP Billiton Plc (London)




BHP Billiton Ltd. ADR (US) (AUD)




US Light Crude Oil (Feb)




Gold (spot)




Aluminium (London)




Copper (London)




Nickel (London)




Zinc (London)




RBA Cash Rate to be decreased by 25bp (Feb) (%)




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