Even if you sold in May, 5 reasons not to go away. The sad, sad, truth, and the dirty lowdown
As noted in our weekly review, "Prior Week: 17 Reasons To Fade The Eu Summit Euphoria Rally", the only real market mover was speculation about the EU summit. Ok, US housing and some other data points might have provided a brief excuse for some movement, but that's all.
We suspect ongoing reaction to that summit will continue to be important, at least in the early part of the week. However this week's contains a typical event packed beginning of the month calendar with enough other events to challenge the EU summit reaction as prime market mover.
1. Reaction to EU Summit: When Will The Sad Truth Dawn
As noted in "Prior Week: 17 Reasons To Fade The Eu Summit Euphoria Rally", we doubt the huge rally on Friday was justified. See that post for full details.
The short version: we expect the rally will be quickly faded, and used as a chance to re-establish short positions in risk assets.
Keep watch for attempt by German leaders to downplay their so called concessions for the sake of their own voters.
2. US Monthly Jobs Reports & Anticipation
This will assume more importance if the EU stays quiet and/or our anticipated reversal of the Friday rally comes quickly and thus essentially puts the EU summit behind us.
Expectations are low, but likely market reaction to the reports and the ones that feed speculation about them is unclear. While we don't believe the Fed can do much via new QE, markets may take another sluggish report as a signal that QE 3 is now more likely, in a "bad news is good news" move.
The related ISM reports that precede these reports will be important not only for the hints they yield about the Friday reports but also for whatever update they provide about the state of the thus far sluggish US recovery.
3. Central Bank Rate Statements
The ECB, BoE, and RBA have rate statements due out this week. No changes expected from the RBA, but we're expecting movement from the ECB and BoE.
The ECB is expected to cut interest rates by 25 bps to a record 0.75%. With German inflation falling and currently at just 1.7%, below the ECB's 2% target, deflation fears may factor in.
The BoE is also expected to cut this week, but by 50 bps, as the UK is back in recession and the BoE has been sounding dovish and willing to cut rates.
4. Wave of Manufacturing and Services PMI Reports From China, Europe, UK, and US
If the EU remains quiet, these could become market moving, especially if they show similar positive or negative results and are mutually reinforcing. The general consensus is for continued contraction in the major economies.
5. OTHER CALENDAR EVENTS
The only other calendar events in this already packed week that might be market moving are Spanish and French 10 year bond sales on Thursday. A poor showing or spiking yields could go far to reverse Friday's EU Summit euphoria, if any remains by then.
Our first concern early in the week is whether the EU summit rally shows any legs or is quickly reversed. If so, the EU could remain a chief concern or, if no new news comes out, the other events noted above could hold more sway, though the any news on the EU crisis rightly remains the chief market mover. A quick reversal of sentiment, as I and others suspect, could set the stage for a new leg lower in risk assets if all the PMIs reporting worldwide, and US jobs reports, confirm the ongoing global slowdown.
If the EU stays quiet, the other events noted above could provide enough of an excuse for some movement. However unless these produce major surprises, they won't have the punch of last week's summit news, and markets could easily return to tight range bound moves.
The current turmoil in the EU has given the USD and boost due solely to the EUR's weakness and risk aversion rather than the USD's merits. The JPY has also seen a burst of relative strength in the past months.
Both of these safe haven currencies are likely to see long term declines. Thus those with most of their assets denominated in these should use the current turmoil as an opportunity to pick up assets tied to other currencies that are better long term stores of value.
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A final thought. Given the possible turmoil in financial markets, we've been looking at some of the healthier rental property markets. If one can get trustworthy guidance and management, these represent an interesting combination of currency diversified income and hard assets, if you choose a market that is both healthy but not overpriced. We hope to have more on this in future articles.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.