Bearish Was Bullish, Bullish Was Bearish
- The Bearish Is Bullish: EURUSD Up, Fundamentals Suggest Otherwise
- The EUR is Rising, The USD Falling, Neither With Major Fundamental Justification, Implies EUR Short Setup Coming
- The EUR and EU stocks finished the week higher despite an overall bearish picture from the week.
- Germany posted good data, but the periphery is the issue for the EUR, and there has been no improvement. If anything, things look worse. Germany continues to resist expansion of the EFSF bailout fund, which remains the only solution available thus far to prevent defaults. The fund has about €440 bln out of a planned €750 bln, which is not big enough if Spain needs significant aid.
- The past week’s EU council meeting produced nothing, deferring any decisions to the next meeting on 24-25th of March. That timing may prove troublesome, because with an important German state election on March 27th, German officials are unlikely to be more generous with their voters’ tax money. They need a default threat and crisis to provide the excuse, as well as concessions from others to show voters they got the best deal possible. Most EU members are in no position to contribute much. That most likely means help from the IMF (i.e. US), China, and/or Japan. The newly elected Republican House of Representatives, with a mandate to cut spending, is unlikely to offer funding unless the EU situation is dire and threatens the US enough to literally scare the money out of them.
- The key point: the EU needs a radical new funding plan, and is unlikely to get it without a crisis to provide political cover. Meanwhile short term bond rates for the EUR are rising and that drives the EURUSD higher.
- Meanwhile Spain, the real EU concern, is casting about for means of recapitalizing its regional banks. Possible plans include forcing non-listed banks to issue shares which the Spanish government would buy, allowing it to fund the banks without creating new bank debt.
- Ireland’s economic think tank has further cut 2011 Irish growth forecasts to 1.5% from 2.25% just 3 weeks ago on anticipated weakening of domestic demand from austerity spending cuts.
- Moody’s cut Greece’s credit rating to junk status
The Bullish Is Bearish
- Markets Drop On China’s Good Growth Data
The rationale is that better than expected growth will bring further Chinese tightening measures which could…dampen growth. However that’s not happening yet despite months of tightening measures, so we find this response baffling given the overall bullish bias of global financial markets, especially in light of the EU’s unresolved troubles.
The news provided a modest dent in commodity prices and whacked commodity currencies like the AUD.
COMING WEEK MARKET DRIVERS
Could Bullish US GDP News Send Markets Lower On Fears Of Reduced QE 2?
Here are the likely sources of market moving news:
EU Watch: Potential Risk Events
- Bond auctions for Italy, Spain, Slovakia, Germany, and the Netherlands. Clearly Italy and Spain are the big concerns. While the results of the past month have been acceptable, wsj.com reports here that demand for January bond auctions was fed by redemptions and coupon payments that returned cash to investors who then sought new investments, meaning that there was only about €8 bln in new debt sales in January. However EU states will be selling net new debt of around €49 bln after accounting for redemptions and interest payments.
- Advanced Rumors Regarding Spanish Banks Report On Non-Performing Loans (due January 31): Expected to be around €50bln, so watch for reports of higher or lower numbers as Spain tries to manage expectations.
US Watch: FOMC, GDP Key, Q4 Earnings Influence Waning, But Is The BoA Earnings Miss a Harbinger of Coming Bank Sector Troubles?
As noted below, the FOMC rate statement and advanced GDP reading are the likely key events for the US this week.
- Bank of America Earnings Miss: Aberration or Warning?
As we’ve repeatedly noted, we don’t believe the foreclosure fraud liability story is anywhere near finished. We had a hint of that with the Bank of America (BAC) earnings miss this past week. The bank presented the miss as an aberration related to mortgage liabilities that were now behind it. However as noted, Business Insider here suggests that significant further bank foreclosure costs lie ahead. For example:
- “Freddie Mac recently conducted a review of a sampling mortgages sold to it by Citigroup, and discovered that mortgages in the sample from 2009 had a 32% defect rate. It’s highly likely that other banks, including Bank of America, had similarly flawed mortgage processes in 2009.
- The recent robo-signing scandal has demonstrated that banks had pitiful internal controls over the foreclosure process as late as October of 2010. There’s good reason to suspect that the mortgage origination and purchase process is still broken too.”
In addition, this lends credence to Chris Whalen’s thesis discussed here, that the critical US banking sector faces another potential crisis year brought on by a combination of:
- Mounting losses from the subprime debacle that have thus far been hidden via officially sanctioned accounting tricks
- Declining yields on assets due to the Fed’s zero interest rate policy
- Rising non-interest expenses as foreclosures accelerate
- Falling non-interest income as the US economy falters
As we repeatedly note, the financial sector has led global stock markets in pullbacks and rallies over the past 2 years, so the sector deserves careful monitoring.
Technical Perspective: Bullish Momentum vs. Bearish Resistance
No real news in this area. We have a multi-month trend higher in risk assets, so we resist the temptation to fight it, especially as long QE 2 and other government stimulus cash keeps asset markets aloft.
At the same time that means new resistance levels are older and stronger, especially if there is no new news to keep markets moving.
Scheduled Calendar Events: US, UK Advanced GDP, Central Bank Statements Are Key
See below for full details:
Big Themes By Region: Will “Bullish Is Bearish” Reaction To China GDP Strike Again With US?
No major themes of note for the coming week’s calendar.
US And UK
Both release Central Bank and Advanced GDP
Both are showing manufacturing strength, however have also seen weakness in retail sales, which are far more influential. Both the BoE and FOMC have rate statements this week. Given that both nations have at best tenuous recoveries thus far, we expect these to reveal continuing dovishness and no sign of rate hikes despite rising commodity prices.
- US: As With China Last Week, Could Bullish GDP Be Bearish For Markets?
The US data is more significant because it could move the US Dollar, which in turn moves forex and possibly commodities.
Major events: Consumer confidence, FOMC rate statement, Q4 advanced GDP, US durable goods.
Note that US GDP expectations are high, yet retail sales fell in Q4 December and were below expectations. In addition, November core figures were revised lower. In other words, the key months for the key sector for US GDP were down. That’s not a good sign for US GDP, 70% of which is consumer spending.
The Wednesday FOMC statement is expected to bring no change to the$600 bln QE 2. Any perceived change in tone of the FOMC statement that suggests a reduction in the pace or quantity of that program would likely hurt risk assets and boost the USD.
Predicting market reaction to GDP is trickier after last week’s downbeat reaction to good Chinese data, as market considerations of government policy outweigh traditional fundamental considerations.
If on Friday US GDP beats or meets expectations, in theory, that’s good for risk assets like stocks, commodities, and risk currencies (AUD, NZD, CAD, EUR, GBP), bad for the safe haven currencies like the USD. Expect the opposite of US GDP misses the consensus 3.5% annualized increase.
However it’s possible that markets could react to good US growth news negatively, as they did with China’s. In the case of the US, risk assets have rallied on the assumption that there would be $600 bln of QE 2 liquidity boosting asset prices. Markets might interpret stronger US growth to mean that the amount or pace of QE 2 could be scaled back
Mostly secondary reports but collectively may be influential if overall theme surprises higher or lower: Assorted flash PMIs, Gfk German consumer climate, CPI
Highlights By Region In Chronological Order
- Tuesday – Nov. S&P/CaseShiller Home Price Index, Jan. CB Consumer Confidence, Nov. House Price Index, Jan. Richmond Fed Manufacturing Index, Weekly ABC Consumer Confidence
- Wednesday – Weekly MBA Mortgage Applications, Dec. New Home Sales, FOMC Interest Rate Decision
- Thursday – Dec. Chicago Fed Nat Activity Index, Dec. Durable Goods Orders, Weekly Initial Jobless & Continuing Claims, Dec. Pending Home Sales
- Friday – 4Q Employment Cost Index, 4Q advance GDP, Jan. Univ. of Mich. Confidence
- Monday – EZ, French and German Jan. Advance PMI, EZ Nov. Industrial New Orders
- Tuesday – French Dec. Consumer Spending, French Jan. Business Survey Overall Demand, German Feb. GfK Consumer Confidence Survey, EU's Barroso and Van Rompuy Speak
- Wednesday – French Dec. Jobseekers, ECB's Stark Speaks
- Thursday – EZ Jan. Business Climate Indicator, EZ Jan. Confidence Readings, German Jan. preliminary CPI, ECB's Bini Smaghi and Tumpel Gugerell Speak, EU's Van Rompuy Speaks
- Friday –German Chancellor Angela Merkel Speaks
- Tuesday – 4Q advance GDP, Nov. Index of Services, Dec. Public Sector Net Borrowing
- Wednesday – BOE Minutes, Dec. BBA Loans for House Purchase, Jan. Hometrack Housing Survey
- Thursday – Jan. CBI Reported Sales
- Monday – Dec. Supermarket Sales
- Tuesday – Jan. BOJ Interest Rate Announcement
- Wednesday – Dec. Corp Service Price Index, Jan. Small Business Confidence, BOJ Monthly Economic Report
- Thursday – Dec. Merchandise Trade Balance
- Friday – Dec. Jobless Rate, Jan. Tokyo CPI, Dec. National CPI, Dec. Retail Trade
- Tuesday – Dec. Consumer Price Index
- Wednesday – Nov. Teranet/National Bank HPI
Australia & New Zealand
- Monday – AU 4Q Producer Price Index
- Tuesday – AU Nov. Conference Board Leading Index, AU 4Q Consumer Prices, NZ Dec. Performance Services Index
- Wednesday – NZ Dec. Credit Card Spending
- Thursday – AU Nov. Westpac Leading Index, RBNZ Interest Rate Announcement, RBNZ’s Governor Bollard Speaks
- Friday – Jan. MNI Business Condition Survey
Conclusions & Ramifications
As last week’s big story was the continued EUR rally and USD pullback as risk assets rise, we stay with that trend until it falters. Asian and US stocks, including our favorite risk appetite meter, the S&P 500, were down modestly, while the major European indices and commodities were up, giving us a mixed risk picture that oddly favored the EZ over the US and Asia, both of which have relatively better long term fundamentals. This suggests that the bounce in the EUR, if not the overall EU outlook, is not sustainable.
The primary trade developing: We see the EURUSD topping out in the coming weeks around the 1.3700- 1.38600 range. Meanwhile we wait for a reversal in order to establish new shorts. Short term traders may attempt to play the rally at their own risk.
Stocks and commodities remain in an overall uptrend. We will discuss particular entry exit points in separate posts as time permits.
DISCLOSURE & DISCLAIMER: AUTHOR SHORT THE EUR FOR PERSONAL PORTFOLIO. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER