Summary Key Market Movers For This Week
- EU Debt Crisis: Latest EU/IMF Plan Overview and Likely Impact, Greek Unrest Undermines Confidence in Sustainable Austerity
- UK/German Elections
- Typical Data-Packed US Jobs Reports Week As Earnings Significance Fades
- Misc: BP Oil Spill, Goldman Sachs Fallout, Technical Resistance For Market
Here are the key forces to watch for the coming week.
EU Debt Crisis: Latest EU/IMF Plan Overview, Likely Impact, Effect of Greek Unrest
This remains the strongest market driver for all major asset markets.
Sunday, the EU has scheduled a press conference to present the final details of the latest Greek aid agreement. Expectations are for a minimum 120 bln over 3 years, which is believed sufficient to prevent a Greek default or funding crisis. Anything less risks confirming the too-little-to late thesis and continued pressure on the euro, European stocks, and global markets.
Markets will also assess the amount and feasibility of deficit reduction being demanded of the Greek government, and the likelihood that the latest plan will actually get approval from the various EU parliaments. Consider:
Markets have usually responded positively to any new agreement, suggesting upside potential for the markets in general on Monday, and especially the EUR.
However, beyond the likely initial optimism, much can quickly turn against the latest plan.
- PIIGS Bond Yields Remain Too High: Unless the still highly elevated peripheral euro-zone CDS’s and bond yields quickly reverse and show sustained retreat, markets may simply conclude additional borrowing by deficit-riddled EUR members does not solve the long-term problem and quickly resume selling EUR.
- Germany: The usual pattern we've seen over the past few months is that optimism on a new Greek rescue deal quickly fades as markets realize key details remain unresolved and Germany starts backtracking and raising questions about whether it will really pay its share in the face of popular opposition in Germany. True to form, there will indeed be doubts cast from Germany.
The Bundestag will not even debate, reconvene and debate the issue until later this week at best, adding at least a week's delay before German participation is secured. With German regional elections on May 9th, clear cut parliamentary approval for the unpopular contribution of hard-earned German tax dollars to Greece is far from assured, as politicians seek to limit damage or exploit the popular opposition to the aid. Any doubts cast on German participation will once again, as they have before, kill off confidence in the latest rescue deal.
3. Further PIIGS Debt Downgrades: Standard & Poors have already downgraded Greek debt to junk status. Moody's and Fitch await details of the EU and IMF program to be unveiled before making their announcements. According to Moody's their decision to downgrade Greece will depend on their political will to implement fiscal adjustment. That's not good because Greek opposition to the cuts is popular and violent. Moody’s just downgraded a number of Greek banks Friday morning.
4. Greek Opposition to Spending Cuts Undermining Chances for EU Aid Approval
- For the plan to work, both sides need to believe the other will meet its obligations. Greek unrest is complicating EU approval of aid, by casting doubt on whether the Greeks can sustain the cuts demanded under the plan and not need further aid later.
- Already on May 1st, Greek police estimate 15,000 took part in violent protests in Athens, another 5,000 in the Northern city of Thessaloniki over anticipated sharp spending cuts and tax increases anticipated as part of the deal in exchange for the above aid. Polls show nearly 80% of Greeks opposed to cuts in private sector wages, though 50.6 % considered the EU/IMF lifeline vital.
- The IMF and the EU have asked for Greece to reduce its public deficit from 13.6 % of output in 2009, to around 3.6% of GDP according to a top union official on Thursday.
- Yet without sustained austerity, further tranches of loans from the EU and from the IMF may not be forthcoming. This means that while IMF involvement implies there may be no imminent threat of default from Greece, this risk and that of a potential EMU could easily reappear later if Greek spending doesnt conform to the agreement.
The ultimate success or failure depends of the plan's ability to ease fears of a default or restructure of Greek debt, because these fears keep CDS and borrowing costs high for the other peripheral economies and greatly increase risk of default and contagion in the EMU region and likely beyond.
Again, once there is one default in the EU, the rest of the troubled states are likely to see their own borrowing costs soar higher still, bringing more sovereign defaults, and losses, bailouts, or failures of institutions with excessive exposure. That starts a new cycle of credit seizure and economic troubles.
Despite the inevitable round of positive rhetoric upon the announcement of the new plan, the markets and the EUR could remain under pressure for a long time to come, as there is great potential for all the same pattern of hope, doubts that Greece will avoid default due to ambiguities about the plan or German commitment to it, rising PIIGS bonds yields and resulting new credit downgrades and default contagion risks.
We've seen it all before, repeatedly. Now, however, there remain only 19 days for Greece to get funding or default. We expect to see EUR/USD selling interest materialize around 1.3400 and will watch that level as a key resistance zone. The 1.3200 area is the current downside support zone.
German/ UK Elections
As noted above, the May 9th regional elections in Germany take on an international importance to the extent they tempt German politicians to pander to popular opposition to Greek aid, and in doing so cast doubt on German participation in the Greek rescue, and hence on the entire plan.
The GBP will likely be moving with how the May 6th elections appear to shape the UK's ability to cut its deficit. The chief problem for the GBP is that it's still unclear how the deficit will be resolved. All parties acknowledge the need, but none has provided details as to how they'll do it, and there is enough room for disagreement on the details to risk further GBP declines on inter-coalition bickering and half-measures instead of quick and resolute action needed to cut the UKs deficit, currently at 11.5%, vs. 13.6% for Greece.
Typical, Data-Packed, US Jobs Report This Week As Earnings Significance Fades
In addition to the above and occasional big name US earnings reports, the coming week is heavy on economic events, not just Friday's climactic US Non-Farms Payrolls and Unemployment Rate Reports, but also those reports that serve as leading indicators, like:
Monday: ISM Mfg PMI (labor component in particular)
Wednesday: ISM Non Mfg PMI (labor component in particular is arguably the single best leading indicator), ADP Non-Farms Payrolls Change, Challenger-Grey Job Cuts
Thursday: Preliminary Nonfarm Productivity, Unit Labor Costs q/q
Other key events of note include:
Monday: PMI Mfg, Tuesday: German retail sales, Wednesday: PMI services and retail sales, Thursday: the ECB rate decision and press conference, German factory orders, Friday: German industrial production
Tuesday: consumer credit, mortgage approvals, PMI Mfg and consumer confidence, Thursday: UK elections and PMI Services, Friday: Producer prices.
The UK election with its likely result being a hung parliament and a week or more of continued uncertainty about the nature of the new government and its likely economic policy bias. The best outcome for the GBP is a clear conservative majority, the next best would be a Conservative/Liberal-Democrat coalition, and the worst – any form of Labour led government.
Monday: SVME PMI, Thursday: CPI m/m, Friday: Retail Sales
Thursday: Building permits, Ivey PMI, Friday: Employment report
Tuesday: RBA interest rate decision and statement. Most economists expect a 25 bp increase to 4.5%, and as always, the statement will be studied closely for hints of further policy moves. Regardless of the outcome, the AUD is likely to continue to move more with overall risk sentiment.
Monday: Labor Cost Index q/q, Wednesday: Employment Change, Unemployment Rate q/q
Misc: BP Oil Spill, Goldman Sachs Fallout, Technical Resistance For Market
Oil Spill: Proving much harder to stop than originally thought and is leaking 25K barrels/day, that's 25 times BP's original estimate and (per businessinsider.com) set to overtake the Exxon Valdez (XOM) 260K barrel spill as the worst ever as early as today. According to The Telegraph (via ForexLive), the total cost is estimated at around $3 billion. Morgan Stanley believes the cleanup will go as high as $3.5 billion. Moreover, it seems likely that this will lead to serious limits on new drilling, as well as added safety and regulatory costs for current operations. In addition to a heavily damaged Gulf fishing industry, that ultimately means higher energy costs.
For stocks of the companies involved, the disaster has also cut over $33 billion from their market value, as shown in the chart below (click to enlarge) courtesy of Clusterstock.com via businessinsider.com.
03 May 02
Goldman Sachs (GS) Fallout Part II: Justice Dept Probe Continues. Separate from the SEC civil fraud charges, the Justice Department is investigating criminal wrongdoing. Should there be enough evidence to charge Goldman Sachs itself (vs. individual executives) many believe the company would go bankrupt, similar to Drexel, Burnham, Lambert and EF Hutton, and Arthur Andersen Consulting in the 1990s.
As the below chart shows (click to enlarge), the bellwether S&P 500 fell 2.5% this week and erased most of its gains for the month, though still closed April 1.1% ahead. Stocks, the key barometer of overall risk appetite, generally remain less than 3% off 52 week highs. However, from a technical standpoint the 200 week moving average (around 1200 for the S&P 500) is proving resistant. Given the fundamental headwinds presented above, the most likely scenarios include continued range trading, barring a further unraveling of the EU debt crisis, which could potentially spark a deeper correction, much deeper if we get a default and spiking sovereign bond yields in the EU.
04 may 02 Yahoo! Finance Chart
Disclosure: No Positions