Markets Pause After Holidays And Year-End Excesses

Includes: FXE, UDN, UUP
by: Ralph Shell

In the trader depleted markets ahead of the New Year holiday in 2014, many of the markets traded with enthusiasm. The first trading day of 2014 seemed to be a reversal from the year-end excesses. Can part of this reversal be the result of the unwinding of year-end positions which enhances the value of portfolios? For some money managers, the size of the year end bonus can be directly related to the year-end value. After all, if a small club of bankers can manipulate the Libor, what markets in the short run cannot be manipulated?

The start of 2014 equity trading brought higher Asian markets but the bulls were unable to continue that trend in Europe. German and French averages were both down about 1.5%, and some of the US Equity averages are now trading down about 1%. Gold and silver, big losers in 2013, rallied, however most commodities worked lower.

Energy markets worked lower. The financial journalist attributed this to the higher USD, but if they were more inquisitive, they might have discovered large specs are long a massive amount of crude futures.

The latest NY Mercantile Light Sweet Crude contract shows the large non-commercials to be long 465K contracts and short only 83K. Further in the spreading category, which can be fashioned with options or with spreads which can also reward the bulls, the total OI is 712K. Any chance the investment bankers and the fund managers were pumping up the crude market during the holidays? The retreat was sharp today as the nearby WTI traded down toward the 95 handle.

The first trading day of 2014 turned out to be a reversal day in many markets, but in the EURUSD, (FXE, UUP, UDN) the high for the last two years was achieved on December 27th, when it appears euro longs went searching for weak shorts. The euro made it to the cusp of 1.39, but has since retreated about 250 pips.

Is it possible the EURUSD can re-group and mount a new assault on the 139/40 handle? This prospect seems unlikely. If the pair can recover to this level we feel it is a sale. Some time three to six months into 2014 we suspect the EURUSD will be trading closer to 130 than 140.

The euro has been a winner this year. We doubt this trend, going forward, will continue. What is euro bullish about US growth of about 3% while Europe struggles to achieve any growth? Further unemployment in the US at 7% is far less than the near record 12.2% in Europe. Granted the ECB mandate is to achieve price stability with no responsibility for the unemployment rate, but the dire straits of the Euro economy cannot be ignored.

And to quote David Marsh, " The euro crisis has gone into remission. ...We are unlikely to see any self-sustaining euro-area recovery in 2014.... "

Still, how long will the constituents tolerate this economic stagnation? Youth unemployment is outrageous, Greece 58%, Spain 57.4, Italy 41.2 and Portugal 36.5%. It should be obvious that the EU, IMF and German designed austerity plan is a plan for economic destruction. Compounding the problems are the German and ECB demands that debt repayments to the creditor nations are expected to be repaid in full. With contracting economies in Southern Europe this will never happen.

One major problem for the European economy has been the curtailed money supply, especially compared to the US and the UK. It was revealed today the EU M3 growth for the past quarter was only 1.5%. Further bank loans to the private sector dropped by 2.3%. Unless there is an increase in the EU money supply, Europe will remain the economic laggard. Should Draghi get German permission to increase the money supply when the Fed is tapering their QE activities, this likely would be quite bearish on the euro. (EURUSD, FXE, UUP UDN, USDU)

It should now be obvious that the prospects for an economic solution to these issues is hopeless with current leadership. Political changes are needed. Will this happen at the ballot boxes or in the streets? The opponents of the single currency are reported to be growing in many countries including France and even Germany. Is it possible the voting for the EU Parliament in May will reflect the changing attitude or will the ruling elites prevail?

With the current trade in the EURUSD around 1.36 we can only wonder what the recent run up to 1.39 was about. The current sell off may be excessive from the run up to the December 27 high. But should there be a bounce back to the 1.3650/1.37 level, we wish to try the sell side.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.