For Monday (and for Asia, Tuesday too), anxiety about whether Greece would avoid default was the prime market focus. From then on, markets moved on the latest headlines regarding the US Fiscal Cliff. When officials issued upbeat comments risk asset and currency markets rose. When they were negative, they fell.
Daily Market Movers
Here's how the week's top market movers broke down day by day.
Monday: Greece And Spain
Risk asset markets were mixed to lower on mostly due to uncertainty from the EU. Specifically, concerns over...
Greece: Whether Greece would get the next tranche of cash needed to defer default and related contagion threats for another few months. Everyone knows Greece will ultimately default, and some major analysts believe Greece may not be in the EZ by next year. It also said that at least four others of the GIIPS block will also need to restructure or default on their debt burdens
Spain: How investors should interpret the Catalan election results' meaning for Spain. On the one hand the separatist parties as a whole showed strength. On the other, the main separatist party underperformed, leaving markets confused. Catalonia is a wealthy region and net cash contributor to Madrid, and a Spain insolvency would likely be fatal to the EU as we know it. So any serious separatist threat is a negative for Spain and markets.
Tuesday: Greece, Fiscal Cliff, Technical Resistance
On Tuesday Asia and Europe were mostly modestly higher on hopes Greece would get its cash, however many were skeptical about the deal's optimistic assumptions about Greek growth. The US session closed down overall after Senator Harry Reid said there was "little progress" in the fiscal cliff negotiations. Risk asset markets were near strong technical resistance, so that too left markets particularly vulnerable to at least pause if not pullback.
S&P 500 WEEKLY CHART
Source: MetaQuotes Software Corp, thesensibleguidetoforex.com
For example the bellwether S&P 500 was facing three layers of resistance:
- The psychologically important 1400 level
- Both its 50 and 100 day moving averages
- Its 38.2% Fibonacci retracement level of the June - August 2012 rally
Wednesday: All Fiscal Cliff - Headlines Driving Sentiment, Spain Helped Too
Asian markets were overall lower in delayed reaction to Senator Reid's comments. Europe and the US were higher overall from optimism that a deal would be reached after positive comments from both President Obama and Republican House Speaker Boehner.
Perhaps falling Spanish bond yields, the result of the EU's approving Spain bank restructuring measures, also helped sentiment. These steps were a prerequisite for four Spanish banks getting bailout funds.
Despite this good news, the EURUSD did not rise. In fact, despite near term resolution of Greece, the Catalonia elections in Spain, and falling yields for Spain (and Italy) the EURUSD barely rose at all this week, and worse tended to close near the lows of its daily trading range. The fact that the EURUSD showed weakness, when it should have shown strength, suggests that markets remain bearish on the EUR and EZ even on a very short term trading basis.
Thursday: Markets Continue to Gyrate With Latest Fiscal Cliff Headlines
Asia closed higher on delayed reaction to the positive Fiscal Cliff comments in the US. Europe also finished strongly higher as Wednesday's optimism on the Fiscal Cliff, aided by positive German jobs data, and falling Spanish and Italian bond yields. US markets opened higher on the same news, but then dropped when Boehner said he was "frustrated" at the slow progress of Fiscal Cliff negotiations.
Friday: Asia Solidly Higher On Japan Stimulus Hopes, Europe and EU Quiet
Asian markets were up on yet another stimulus package in Japan and hopes of further easing after the coming elections there. Europe and the US were little changed Friday, probably due to both lack of major news and caution ahead of the coming week, which is a typical first week of the month packed event risk week.
It was a quiet weak before next week's packed calendar. See our report on coming week market movers for details.
The week taught us little new, it was more a review of where we stand.
Here are a few thoughts and lessons.
EUR Weakness Despite Good News Belies Rally
Near term resolution of Greece, Spain's Catalonia elections and bank bailout, as well as falling borrowing costs for Spain and Italy yields were all big near term positives for the EUR. EU data was not good overall, but that's no surprise. It should have been a good week for the EURUSD, but instead it was essentially flat, and still no decisive move over 1.3000. The USD index was also flat, so the pair's weakness can't be attributed to some USD strength.
The key lesson here is that markets remain bearish on EUR, and thus on the EU. If this week's new can't move the EUR higher, then what can? Perhaps it's only hope is a major boost in overall risk appetite, but even a resolution of the fiscal cliff is unlikely to provide more than a short term pop at best.
Democracy, Weak Leaders, Continue To Stymie Debt Crises Solutions
Why have policymakers in the EU, US, UK, Japan, and elsewhere have been unable to do anything more than defer the painful steps needed to end their respective debt crises?
UBS's Art Cashin captured it perfectly:
One Sentence Perfectly Describes The Quandary On Three Continents - The ultimate award for candor and honesty must go to Jean-Claude Junker (Prime Minister of Luxembourg) who apparently said - "We all know what to do, we just don't know how to get re-elected after we have done it." That says it all. (Hat tip - Keene Little, Option Investor)
Practically speaking, this means the common theme to how leaders approach their deficits remains: no one with political clout gets hurt for as long as possible. For any leader with access to a printing press, that means more money printing ahead. That means more risk of debasement for the USD, EUR, JPY, GBP, and other currencies as leaders defer future pain with borrowed money.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.