When, after five weeks of a EUR/USD pair grinding lower, we felt the bear position was too popular, and a rally was due. For the last two weeks, we have had that rally, taking the market from a low of 1.2626 to a high of 1.3183. For those traders good or lucky enough to catch the rally, it was hard to stay with a position since the news never seemed to favor the bulls. This market has been contrary, tormenting the bears also. How can we have, they wondered, a 550 pip rally when there is no viable solutions for the euro debt crisis?
A reason given for the rally every day seemed to be there is going to be a settlement of terms for the Greek bail out. The Greeks are busy negotiating a hair cut on existing debt and attempting to negotiate favorable terms on the replacement bonds, which seems a farce since they will probably default on those bonds too. When the settlement is announced, will this be another buy the rumor and sell the news situations?
Meanwhile at Davos Switzerland the world's financial elites are meeting for an extra long weekend of gourmet food and fine wine. There seems to be no shortage of speakers voicing their ideas but there seems to be a shortage of listeners. U.S. Treasury Secretary Geithner is urging the Europeans to "Build a bigger firewall" which means to get more funds available for bail outs as the debt crisis grows.
It was interesting to note the European M3 Money Supply was announced today. M3, the broadest measurement of money supply, increased by only 1.6%, down from the anticipated 2.2% and a 2% gain in the previous year. Private loans made were likewise less than anticipated. This shows a tightening of liquidity, and additional funds are needed to prevent a credit lock up.
Objecting to increased liquidity, euro bonds, an increase in the ECB balance sheet and sovereign assistance to Greece and other countries in need is Germany. Further the Germans, like a bunch of deaf dunderheads, continue to insist that their solution, a decade or more of austerity, is the only solution. Experts warn austerity alone will only reduce economic activity, making the debt crisis worse.
We got a snapshot of how well austerity is working in Spain. During the fourth quarter the number of unemployed increased, up 295,300 to 5.27 million. The rate now stands at 22.85%. With so many unemployed, retail sales also fell by 6.2% in December and 5.8% for 2011.
Leaders in Davos have warned the Teutonic prescription of austerity alone will result in riots, strikes and slower economic activity. That has been the case in Italy this week. There, taxi and truck drivers have gone on strike against economic reforms, higher fuel prices and work rule changes. Truckers have blocked the roads, and production and deliveries of Fiats have been halted because of the strike.
In the U.S., the advance GDP was reported as a positive 2.8%, better than last quarter's 1.8% but shy of the 3.0% guesses. This is the first of three estimates for the quarter. They are usually adjusted lower, but it still compares favorable with Britain's negative 0.2%, and estimates from the IMF warning that much of Europe is in or headed for a recession. Next week we get the U.S. NFP report as well as the U.S. employment report.
Markets do not seem to be currently responsive to fundamentals. Nor, like everybody else, are they paying attention to advice being dispensed from the experts in Davos. We have all heard about the messy debt situation in Europe, but there have been many chapters in this story. Traders are tired of responding to each new horror story of what might happen. What will get the markets attention, though, is the bond markets.
My guess is the current euro rally has about run its course. Should sovereign debt rates in the peripheral markets start to climb, there may be another leg down in the EUR/USD, perhaps to the low twenties.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
