By Dean Popplewell
And we thought last week was going to be a specifically difficult week to get a handle on things? This market is already beginning to feel like it wants to throw another major wobbly now that the single currency has managed to register a cent decline since Sunday’s open. A sense of market malaise has fallen again on the EUR and the eurozone sovereign bond market as investors question whether the upcoming EU summit is likely to yield any significant new steps to ease this periphery debt crisis? This uncertainty is managing to push Spanish and Italian bond yields higher again this morning.
For a period on Friday, riskier bonds had rallied dragging the common currency with it, amid speculation that EU leaders were considering a number of “dramatic measures to arrest the recent rise in yields to dangerously unsustainable levels.” An easing of the ECB’s collateral rules temporarily helped to relieve the pressure on Italian and Spanish debt. However, not content with Germany’s victory over Greece in the Euro’s, Merkel again resisted pressure for common EZ bonds or a more flexible use of Europe’s rescue funds. She agreed with fellow leaders from France, Italy and Spain on a +€130b package to revive growth. With no secondary bond action or a move closer to a eurozone banking union, has periphery yields climbing this morning while risk averse Bunds benefit from investors resulting flight to safety.
This weeks highlight will be the EU leaders gathering for the much awaited two day summit beginning Thursday. Already, with Greece’s newly elected Prime Minister and Finance Minister unable to attend, for various medical reasons, is expected to hurt the country’s attempts to ease the terms of its bailout. Analysts note that negotiations on various growth-supporting measures do appear well along, with “decisions possible on boosting the capital of the EIB, reallocation of structural funds, and project bonds.” With German leaders consistent in their opposition and unwillingness to endorse more radical steps towards debt mutualization, such as Eurobond issuance or direct involvement in bank recapitalization by the EFSF/ESM, broader Euro issues are expected to be only “incremental this week.” Persistent euro debt market relief remains a ways off, again allowing spec investors to probably reset freshly minted EUR and growth sensitive short positions. The market again seems rather bullish on the dollar.
Aiding the risk averse trade this morning is China. Printed story lines, regurgitating what every investor has questioned at least once before, are providing evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of their troubles. In the West, we follow the money, in the East, you follow the coal. Apparently, record-setting mountains of excess black stuff is accumulating at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. Plant managers have been falsifying reports to give the illusion of growth. The market has always been weary about digesting Chinese data. The world has always been given the results and not always the Chinese data. Both technically and fundamentally its a plausible situation. It’s no wonder risk has got the jump on to the exits.
With Friday’s risk-less move lower, the retail sector has been seen taking back most of their short positions that were initiated earlier on in the week. The sector currently sit comfortably flat ahead of recent recoded lows. The risk reward percentages continue to favor shortening the single currency, but not at these levels. Despite the EUR/JPY selling intensifying, with stops driven out below (99.80), risk off bias continues to gather momentum, as peripheral yields rise and spreads widen out. Hourly studies head south and show downside risk along with the daily charts favoring the short trade. Perhaps the retail sector is not going to get their opportunity to sell rallies? Market momentum is expected to test support around 1.245, especially with large stops reported below 1.2430. Investors have gotta have something to aim for!