Cliff Wachtel's  Instablog

A weekly overview of what to watch for traders of binary options and commodities via binary options, options, and standard spot market instruments

Last week we asked the same question in our title of our weekly market movers review and preview. We continue that theme this week.

LESSONS FOR THE COMING WEEK, & TRADE IDEAS

The combined threats currently facing markets have been with us since at least the start of the 2011:

• EU debt concerns,
• global monetary tightening from rising rates, spending reductions (especially the end of QE 2 and QE 3 politically impossible for now)
• signs of stagnating or declining growth in virtually every major developed economy, including China

Yet as the chart below shows, the risk asset rally has continued, impressively overcoming even the separate 3 crises from mid February to March: MENA unrest, EU, and Japan.

S&P 500 WEEKLY CHART COURTESY OF ANYOPTION.COM  03MAY15 0145

However, now risk assets just completed their second straight weekly pullback since February. What changed? What’s the catalyst behind this rare 2 week drop? What’s the likelihood that it will continue? Below we’ll summarize and analyze the technical and fundamental evidence accumulated over the prior week, and derive what lessons are available for the coming week.

The impending reality of potentially destabilizing losses to the EU banking system from a partial Greek default, followed by a growing likelihood of more of the same as Portugal and Ireland do likewise, is the obvious catalyst for this week’s selloff in risk assets. One partial default is likely to lead to more, due to either:

• Scared bond markets making raising borrowing costs beyond reach or
• Portuguese and Irish leaders being politically unable to survive if they’re seen as getting a worse deal for their voters than the less deserving Greeks

Late last week there were reports that Greece was so desperate it was threatening to exit the EU. All officials concerned denied this, but the rapid response of emergency meetings and promises of easing terms suggests the threat was indeed conveyed. There were similar noises about easing terms for Ireland and Portugal as well, further suggesting that the possibility of a wider prison break has not eluded the EU.

In the past, bad news about the PIIGS could be overcome with good news from the core nations. Not this past week, as Friday saw the EURUSD and other assets rally on stronger than expected EU GDP figures quickly reverse, with both the S&P 500 and EURUSD daily charts showing these closing bearishly at the lower end of their range.

Given the threat posed by the last EU developments, the other bearish fundamentals noted above have become much harder to ignore. Comstock Partners published a useful, more detailed summary of the bearish fundamentals facing markets. We quote the key excerpts:

1. Underlying all of the specific problems is the massive debt
2. QE2 is ending on June 30^th
3. Fiscal policy is about to tighten as well
4. The European Union’s (EU) sovereign debt problem is not just a headline risk; it’s a real one.  As those who know far more than we do about the situation have pointed out, the EU’s weak sisters are not facing a mere liquidity crisis, but a solvency crisis.  It seems that a restructuring is virtually inevitable, causing severe damage to a number of major European banks.  Furthermore, the EU will be lucky if the restructurings are limited to Greece, Ireland and Portugal without spreading further.
5. China is battling against soaring inflation even on the officially suspect government numbers.
6. The Japanese earthquake is yet another headwind to the economy.  In addition to being a severe blow to the Japanese economy, it is having an important impact on the global supply train
7. The Mid-East turmoil is continuing and is showing no sign of slowing down
8. The economic recovery appears unsustainable without additional government stimulus, which is politically off the table

As we discuss below in the sections on lessons for the coming week and likely coming week market movers, the deteriorating EU situation added to the pre-existing bearish fundamentals has created a similarly worsening technical picture on the charts of assorted risk assets. That makes markets progressively less willing to give risk assets the benefit of the doubt and buy on dips.

DISCLOSURE & DISCLAIMER: AUTHOR SHORT EUR NO OTHER POSITIONS, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER