By Dean Popplewell
The Greek results were supposed to provide some breathing space, a temporary piece of mind at least. Instead, dealers now finds themselves believing that it would have been easier to trade a Syriza win in Greece. That result would have been the nod to short risk. There is now a continued uncertainty with a risk off bias as the negotiations begin to form a Greek parliament that will “ultimately be fragile.” The Greek election delivered a slim parliamentary majority to pro-bailout parties. The New Democracy party is now tasked to form a coalition party. It’s not much of a market surprise, but in reality, the hard work is in front. However, euro’s core and periphery concerns have not changed. The regions inability to introduce sweeping policy measures provides the market more of the same uncertain mix. Will this result in the post weekend rally proving to be a short lived affair? Until funding concerns in Spain and Italy abate and their yields fall, how long can the respite for the EUR last?
This week is anticipated to become a watershed for global policies with significant behind the scene meetings commanding global agendas. Obviously, the aftermath of the weekend elections in Greece will dominate many investors attention, but markets will also focus on measures to support Spain after today’s release of the auditor report on bank recapitalization needs. Europe’s woe is the focus at the G20 summit in Mexico today and tomorrow were detailed policy response are not publicly expected from the meeting, that will be for the European forums later. The market anticipates that when the euro group finance ministers meet this Thursday they could be hashing out more details on their plan to support Spanish bank recapitalization. Yep, the plan that was previously bungled according to the IMF. The post-bail out party relating to Spain only lasted a few hours. How quickly is optimism over Greece going to fade? So far it seems it could be darn quick. Finally and what seems like a eureka moment, the big four deem it necessary to meet. The leaders of Germany, Italy, France and Spain will meet separately on Friday, but do not expect any big announcements ahead of the EU summit at the end of the month.
Will the Fed come to risks rescue? Investors know that QE3 signals from the FOMC at the two day meeting this week will be much more important in moving risk that the eurozone crisis has been in moving the markets. The recent deterioration of U.S. economic data and financial market conditions has boosted expectations for some Fed support this Wednesday. Many interested parties are counting on an extension of the “Twist” at a minimum, and the dollars negative move over the last seven trading sessions suggests there is at least some expectation for further measures being priced in. One gets the feeling that if its just the “Twist” risk lovers could be disappointed, and leave them vulnerable to renewed downside pressures.
The aftermath of the Greek election continues to see the specs somewhat significantly short the single currency. The initial relief rally looked that it was going to be squeezing many out of the game. However, they can thank elevated Spanish yields for saving their hide this time. Maybe it will be a different story when U.S. dealers take over the books? Risk can be on longer than bears like to think. Everyone has been commenting this morning that the common currency is expected to be making further gains because of the Greek outcome. However, the real reason for taking on risk occurs outside of the country. Germany continues to hold all the wild cards. They need to be further pressured to make greater concessions for growth measures before the EUR can find its true traction. The reality remains, until we know what the Euro leaders are expected to deliver at the summit at the end of the month the “broad progress toward a better-functioning monetary union, the downside risks from Europe are going to remain.”
Is this post election rally more feeble than last week’s Spanish bailout? At least that rally lasted for a couple of hours, this one has been a bit more pathetic. Failure to hold the relief rally into the 1.27’s now puts the pressure back on the EUR. The retail sector have stood firm throughout the election and held on to their short EUR positions.
To the many bulls, from a technical standpoint, 1.2620 has to convincingly hold to keep the EUR in upward momentum. Yes, the relief rally looks brief and yes we trade below last weeks close, but the risk reward favors further upside from here. Can the U.S. session deliver? Both hourly and daily trend studies have not rolled over just yet, they are ticking higher. The market continues to prefer to set longs on dips. It feels that they may get ample opportunity to do so today!