By Dean Popplewell
This market needs to catch its breath after the selling pressure across currencies and the blood bath in equities this week. It can be rather monotonous to listen to the euphoric rants of the EUR bear. To date, it has been an unfair playing field. They have all the negative ammunition. For the bulls, it seems they have to wait for that squeeze going just a wee bit too far to the left. Risk markets, especially commodities, are very oversold after a dozen or more down days caught in a one directional play. The Greek situation, other than mostly drive-by headlines, will not be resolved until the elections in June and this should create a shift back to trading fundamentals where so many U.S. bulls remain optimistic. Be weary of Facebook Friday, it may cause a short risk squeeze of its own.
It has all come down to the eurozone creating a suitable firewall that investors and capital markets feel comfortable with or face a potential breakup of the union. It’s not rocket science; it’s been a perquisite of the euro-zone bureaucratic administrations for many months. They just have not been able to find the winning formula that will appease market concerns. A euro political shift to the left makes current administration jobs that more difficult, as political powers fight for their own survival in a changing of the guard environment. Europe knows it must make more progress towards a fiscal union to mitigate these financial risks. The countries themselves, especially the peripheries, need to stabilize their own banking systems and work towards a closer fiscal cooperation. Otherwise, the FI market will make funding costs that more expensive and squeeze their liquidity dry.
The market has traded rather timid with Spain coming to tap the bond market. It is all about gauging risk appetite for eurozone risk. Is the demand there to take down product? For most of the morning Spanish government bond yields did nudge higher, not unusual, as dealers made room for around EUR1.5b-EUR2.5b in three and four-year bonds. Obviously market concern was that demand may be weak because of ongoing fears of an imminent Greek exit from the monetary union. However, another successful Spanish auction has come and gone and financing for the year now stands at +55%. The caveat of caution comes from the percentage transfer of paper from non residents back into Spanish banks hands. Foreign holdings of Spanish bonds has decreased from +43% to +33% in the past year, while domestic banks inventory has increased. It’s not so good for a nervous Spanish financial system to own more of its own debt.
With the auction done and dusted, the lack of a material bounce from the single unit currency will enable the quick spec to maintain their bearish views. The short trade continues to work, but with the 9-day RSI printing it lowest in nearly four years has some tech analysts cautiously concerned. Will the low currency price, so close to this year’s lows, dissuade fresh selling? The daily downtrend remains intact with the market somewhat hellbent on visiting those reported large stops placed below 1.2680. Expect the further optionality at the usual 25-tick prices of 1.2650 and 1.2625 to try to slow the rate of EUR decent.