By Dean Popplewell
Last weekend’s Greek election has done little to comfort investors despite a victory from the pro-bailout parties who have appeared to have averted a messy exit from the single currency. Investors faith could not even last until lunch time, similar to last weeks Spanish bank recapitalization bailout. Ever since the official results, the market has continued to lean on the periphery debt market, pushing Spanish 10-year borrowing cost firmly above the psychological +7% mark. The level that some other peripheries lost access to the debt markets. Keeping periphery yields under pressure this morning is the Spanish governments announcement that the key audit of its banks will be delayed until September. The market had been waiting on these reports to access the full scale of Spain’s financial problems. In the current environment, any Spanish sign of uncertainty is going to increase investor angst and hinder the common currency’s prospects.
The market is tying to give some benefit of doubt. However, the EUR inability to build on initial gains after the Greek result, despite extreme short market positioning, highlights the lack of conviction that individuals have in resolving the European debt crisis. The bulls are looking for any break. After the Fed’s two day meet, the market will again focus on Thursdays’ EU finance ministers meeting to provide some relief. This will only occur if some concrete measure are made publicly available. EU policy makers tend to look for a bigger stage for their announcements, so if anything, it will be the end of the month and not this week. Until then, the EUR has the capacity to breach recent lows and build up further negative momentum.
There is little faith that the ECB will step in and halt the rise in yields, it seems odds on that the revival of the central banks bond-buying program will do little to avert the need for a Spanish bailout. The ECB would rather wait to see political action taken before intervening. Many believe that the SMP intervention will psychologically be counter productive as it will “only displace outstanding bond holders on the credit ladder and does nothing for the country’s debt profile.” If the Cbank were to intervene, dealers would take this as an opportunity to sell rallies to liquidate their positions rather than a positive action.
With little euro positives been presented this morning, adding another to the euro grief pile is not going to matter much. German expectations (-16.9) fell at the fastest rate in more than a decade, indicating just how precarious the euro situation has become. The results indicate that any optimism for the EU’s strongest economy is still too soon as its periphery partners suffer a deeper economic downturn. Digging deeper, the current conditions index fell to 33.2 from last month’s unrevised 44.1.
Fed action may be imminent, and then again it may not. Its two day meet begins today and a rate announcement tomorrow. The market is heavily looking towards some action. If the Fed fails to deliver, then investors should brace themselves for a substantial fallout. Investors know that QE3 signals from the FOMC 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 tomorrow. 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 are attempted to be 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 retail sector continues to be running with similar short EUR outright positions entered late last week. They had the nerve to hold these positions through the brief EUR post Greek rally and in the current environment has the opportunity to leverage those gains despite the plethora of support on the downside. The underlying bias continues to see the single unit being sold on rallies, with investors preferring to set short positions as the daily trend levels have again rolled over. The optimist continues to wait for some G20 crumbs for a sign to keep what’s left of their market bull position open!