NB: For analysis of prior week’s key market drivers and their lessons for the current week see here.
COMING WEEK MARKET MOVERS
Sovereign Debt Concerns Could Still Dominate Markets
Potential complications over the coming weeks include:
While Greece is due to receive further bailout funds again in September, in theory if it hasn’t progressed in implementing its Medium-Term Fiscal Strategy and privatizations program then the Troika ( EU/ IMF/ECB) could threaten to withhold funds once again.
Beyond September, Greece still needs to negotiate a second bailout of about €120 billion.
Even if the ratings agencies somehow accept that the the proposed extension of Greek bond maturities is actually voluntary and thus not a restructure (aka default), EU officials still need to find more private investors who are willing to voluntarily extend the maturity of their Greek debt holdings. So far French and German banks have pledged to do this, though German banks are only willing to extend €3 bln of their holdings, out of the €30 bln target.
Greece may have to pay higher rates of interest on the new, rolled over bonds to entice more investors to follow suit, currently it stands at 5.5 per cent, far below Greece’s 10-year yield, which is currently trading at 16.3%.
Of course the past weeks have shown this threat to be empty unless somehow a bank bailout plan is already in place that could maintain confidence in European and global banking stability.
Ireland And Portugal And Spain, Oh My!
Of course, regardless of how rating agencies respond, any perceived breaks to Greece will be demanded by Portugal and Ireland, each of which present at least the same contagion risk . For example, Spain is more exposed to Portugal than Greece, and the EU cannot afford to bail out Spain with its current reserves for bailouts.
If the fiscal consolidation plans of any of these disappoint, their borrowing costs could rise beyond their means, forcing them to seek aid. Spain continues to uncover new hidden local debt which at some point could re-ignite serious concern about this too-big-to-bail-or-fail debt beast.
Ireland To ECB: You Can Take This Bank And Shove It
The ECB already has about €100 bln of Greek, Irish, and Portuguese debt alone on its books, before even considering other dubious bond holdings. It has about €10 bln total capital, making it another dead man walking.
The state of Irish banks has become so dire that author and advisor John Mauldin recently wrote that, in the near future, Ireland could well walk away from its own guarantees of €60 bln in ECB loans to Irish banks and just give the ECB the banks. This alone would render the ECB insolvent, even before considering what losses it could take from the other PIIGS bonds.
Italy Getting Sucked In
Until this past week Italy had escaped concern about its own debt, however Italian bank exposure to Greece has raised alarms and brought threats of credit downgrades. Ongoing trouble in the other PIIGS nations risks further sucking Italy into the debt crisis vortex. The Italian economy is larger than Spain’s, and presents a similarly fatal threat to the EZ’s survival.
Don’t Forget US, Other Exposure To The EU
As noted in prior weeks, US institutions have roughly equal exposure to the PIIGS as do banks of France and Germany via CDS writing and money market paper. China has said it will be increasing its EZ exposure.
Ongoing Global Slowdown Theme
While concerns certainly have eased for the moment regarding the EU, global economic data continues to point to slowing growth, at best, in every major economy. The past week showed slowing manufacturing in every major economy besides the US, which surprised a bit to the upside.
The Technical Picture: Trade The Range
Looking at the bellwether S&P 500 index, the picture remains uncertain. Click to enlarge:
S&P 500 DAILY CHART COURTESY ANYOPTION.COM 01jul 030358
The fundamental picture noted above suggests the current bounce is just that, a bounce off support. Fundamentals offer little reason to believe in a break past late April 2011 highs.
We see that the Greek relief rally kept major indexes within their 2011 trading ranges and prevented a very bearish breakdown below the 200 day EMA. However at current levels we’re just stuck within a monthly trading range.
Still, considering how dire things have been, this can be taken as a sign of resilience, which in turn suggests stocks and other risk assets could rally on any sustained improvement in the results from the coming week’s calendar, and we’ve a busy week ahead.
Looking at the both the daily and monthly EURUSD charts, there is a similar, confirming picture of ongoing consolidation with a bias to more downside in the coming weeks, though some additional bounce certainly can’t be ruled out.
Looking at the daily EURUSD chart below, here’s what we see. Click to enlarge:
EURUSD DAILY CHART COURTESY ANYOPTION.COM 02jul 030404
Firm resistance around the 1.4500-1.4600 zone from both recent rallies topping out around 1.4550
Both the 20 day EMA (yellow) and 10 day EMA (blue) are in the process of crossing back over the 50 day EMA (red), suggesting that the pair may have some more upside forming to challenge recent highs around 1.4600, assuming no new negative news about EU debt issues.
We have a likely rate increase this week for the EUR, which could spark either further rally or profit taking, as did the last EUR rate hike.
As for the monthly EURUSD chart below. Click to enlarge:
EURUSD MONTHLY CHART COURTESY ANYOPTION.COM 03JUL 0411
Top Calendar Events & Themes
The 3 big calendar themes include a wave of major Australian and US data, 3 central bank rate decisions, and US monthly jobs reports.
Three Central Bank Rate Decisions
July 5th RBA, July 7th BoE and ECB: The first 2 are expected to hold rates steady, and the ECB is expected to raise rates 25 bps to 1.50%
US Monthly Jobs Reports And Related
In addition to the Friday monthly reports, expect some volatility in risk assets if we get any surprises from reports that provide hints about the Friday result. These include:
Wednesday: ISM non-Mfg PMI
Thursday: ADP non-farms payrolls
Monday: Building approvals, retail sales, ANZ monthly job ads
Tuesday: Trade balance, RBA statement
Thursday: Monthly jobs reports
Other Top Events
Monday: Swiss retail sales, US bank holiday (light volume & follow thru from Europe session onwards)
Tuesday: UK Halifax HPI m/m, services PMI
Wednesday: Canada building permits
Thursday: see above BOE, ECB rate statements, US ADP NFP, also CAD Ivey PMI
Friday: US and Canada monthly jobs reports
What To Do? Key Points
In the short term, both fundamentals and technical data suggest risk assets are now back in the middle – upper range of their 2011 trading ranges, which is not a great place to open low risk positions, with neither resistance nor support nearby for an attempt to play a low risk bounce off one of these.
The overall tone of fundamentals remains negative as cited above, so the odds favor waiting for a bounce off of 2011 resistance levels for the above assets.
Unless next week’s data is surprisingly bullish, odds are slightly to the downside, especially if US jobs data continues to suggest little progress in job creation.
In sum, a good week for all but day traders to stand aside.
Over the longer term, with persistent long term troubles in the underlying economies of the EUR, USD, GBP, and JPY, the current weakness in gold prices may well prove to be a developing buying opportunity for this ultimate currency hedge.
Note the weekly gold chart below. Click to enlarge:
GOLD WEEKLY CHART COURTESY ANYOPTION.COM 04JUL 030438
The key point, gold is getting close to its 20 week EMA (yellow), which over the past year has served as strong support. Given the rising odds that the ECB will need to print money over the coming year, we like buying gold on dips.
Long term fundamentals are not good for either the EUR or USD. The situation for the USD similarly suggests that even though QE 3 is off the table for now, both the debt ceiling debate tension in the near term, as well as the coming presidential election and the temptation it presents the Obama administration for spending.
Thus both the EUR and USD could experience renewed weakness that will be good for gold and other currency hedges.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?