The Ongoing EU Sovereign Debt And Banking Crisis
As we’ll discuss in Part 2, no one believes the latest second annual Greece bailout is anything but yet another expensive short term deferral of what must eventually become a wave of sovereign defaults in the EU and bank bailouts that will follow worldwide.
Ongoing Slowing Growth In Virtually Every Major Economy
The past week showed yet more evidence of slowing major economies, with more coming as they cut spending to reduce deficits.
- In the eurozone (EZ), composite PMI’s, consumer confidence, and ZEW survey all declined by more than expected. In Germany, the EZ’s chief growth driver, the manufacturing PMI new orders index dropped 47.6, indicating coming contraction.
- In China, July flash manufacturing PMI survey fell from 50.1 to 48.9, suggesting contraction ahead in the manufacturing base of the world’s second largest national economy.
- In the US, June existing home sales dropped again, suggesting renewed deterioration in US real estate, even after so much bad news already.
- In Australia, the May Westpac leading index was down -0.1% and 2Q business confidence fell from +11 to +6.
- US Q2 GDP this week is expected be dour
Rising Risk Of US Debt Trouble
Risk of a disturbing US credit downgrade, even if a default is averted, is rising because the past weeks have revealed a genuine ideological conflict in Washington over the debt ceiling and deficit cutting, which in turn threatens to undermine the markets’ heretofore solid confidence in America’s ability to take decisive action on its debt troubles.
Persistently High Oil Prices Sapping Away Consumer Spending, Growth, While Fueling Inflation
Nothing more to say than that.
Technical Picture Stays Bullish
Yet despite this dour picture, risk asset markets not only remain near their multiyear highs, but after two weeks of controlled, rather modest pullbacks, markets ignored them and risk assets rallied despite climaxing EU and US debt troubles that are clearly far from being resolved.
See for yourself. Here are 3 daily charts that well represent what happened overall in global equities, currencies, and growth related commodities (though copper was fairly flat this past week).
[Click all images to enlarge]
DAILY CHARTS JULY 6-21 COURTESY ANYOPTION.COM 02JUL 24 0105
The Main Point: The above 3 daily charts representing risk assets in equities, currencies (a look at other daily charts for equities (like the DAX), risk currencies (like the AUDJPY), and growth related commodities show the above charts were indeed representative) rose during week of July 18-22 for the first time in 3 weeks, and as their monthly charts below show, remain close to multi-year highs.
MONTHLY CHARTS 2009-PRESENT COURTESY ANYOPTION.COM 02JUL 24 0105
03jul 24 0114
Yes, most risk assets pulled back slightly Friday, though that could be attributed to all 3 taking a normal breather after facing significant resistance levels comprised of both psychologically significant “round number” price levels and, in the case of the S&P 500 and EURUSD, long term downtrend lines on their daily charts.
S&P 500, EURUSD DAILY CHARTS 05july 24 0231
Just as a reminder, global equities indexes, risk currencies (check out the AUDJPY as well as the EURUSD, EURCHF, or EURJPY), and growth related commodities remain in long term downtrends on their monthly charts.
Prior Week’s Market Movers
So what actually did move the markets last week?
Optimism Concerning EU, US Default Threat Resolution
Except for Monday, markets steadily anticipated at least a deferral of the second annual Greek default threat crisis, and reacted positively to latest second annual Greek rescue plan when announced Thursday, as flawed as it was (see below for why). Equally surprising was that markets remained so sanguine about Washington’s failure to reach a debt ceiling agreement with time to avoid an August 2nd default running out.
Q2 Earnings Provide Additional Excuse for Rally
Q2 earnings season shifted into high gear in a week packed with big name earnings announcements, While it should be no surprise that most earnings reports beat expectations, these usually provide at least a short term boost in risk appetite in the absence of countervailing bad news. That was once again the case last week.
Lessons & Ramifications
That the markets were able to advance last week despite the very bearish backdrop again rams home a central lesson of trading and investing. Whatever your analysis of the fundamentals, understand that in the short term you’ve got to watch the charts and let technical analysis determine your actual entries and exits. I’ve been bearish on risk assets for years, but that hasn’t stopped me from staying long on a variety of long term holdings because, even though we may be in a long term bear market, price action for most risk assets has been bullish strongly since March 2009, and may remain so, as surprising as it seems.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.