A weekly strategic overview of primary market driving forces both fundamental and technical for the prior week, their lessons, and likely market movers for the week ahead. Perfect for investors and traders of indexes, stocks, forex, and commodities, whether they use traditional spot market instruments or binary options.PRIOR WEEK MARKET MOVERSFUNDAMENTALS: Bernanke, EU Events Dominate Market Focus While The Greek Crisis Quietly DeterioratesBAD US NEWSUS Monthly Jobs Weighed Early In The Week
The prior Friday’s ugly monthly US jobs report continued to weigh on markets Monday, especially in Asia where traders had yet to respond.Bearish Ben
Tuesday’s bearish Bernanke remarks hit risk assets with a double whammy as he indicated both a US slowdown AND no coming QE 3.
There’s no reason to expect that until things get truly desperate, especially given that as QE2 ends it’s clear that it failed to restart growth, yet came at a cost of a higher deficit, weaker USD, inflated asset prices, and worst of all, reduced ammunition to provide stimulus in the future when it might actually do some good.The Week QE 2 Officially Deemed A Failure?
In the wake of QE 2’s failure to jumpstart the US economy, there is now growing acceptance of the idea long argued by some, that QE 2 as a means of reigniting real growth was doomed from the start (though may have been effective at keeping interest rates low and thus keeping banks from greater losses from defaults as mortgages reset to higher levels).
The reason for this is a balance sheet recession, which by definition cannot be solved with stimulus. A balance sheet recession is one caused by a sharp reduction in spending to reduce excessive debt. Thus spending and job growth cannot be stimulated w/ low rates and liquidity while the households and businesses are cutting spending to cut debt. Thus there’s no demand for the easy credit as households reduce debt and spending and business don’t see demand to justify new expansion and loans to fund it.
Thus the US has wasted much of its stimulus ammunition, spiked the deficit and mauled the dollar. That means there be less, if any, funds available for a stimulus program when the deleveraging is over and a stimulus plan might actually spur real spending, productivity and growth.
Indeed QE 2 is so off the menu for now that even hedge fund manager David Tepper, who boldly and correctly predicted QE 2 would come and would lift risk assets regardless of other bearish fundamentals in the late summer of 2010, said this week there was no QE 3 coming. See: David Tepper: “There Is No QE3 Coming Down The Pike”BEARISH EU EVENTS: TRICHET BEARISH, GREECE, FAILED SPANISH BOND AUCTION, ETC
So much bad news out of the EU it’s hard to know where to begin.Trichet Downbeat Press Conference
As a market mover, the clear big event in the EU was ECB head Trichet’s press conference in which he indicated the ECB would raise rates in July but that would be all for a while, given the, ahem, uncertain state of the EU economy. Risk assets fell, particularly the Euro, which had been rallying mostly on hopes for an extended period of rising rates and hopes that the debt crisis, Greek or otherwise, would be deferred while they bought the EUR for a while to benefit from its rising interest rates.Confidence On Greek Rescue Fades: The Usual Brinksmanship Like Last Year?
Meanwhile, although markets have assumed that Greece will ultimately get the cash it needs to avoid default and serious risk of a global financial crisis, once again, just like they did last year, failure to settle on the details is keeping markets on edge as the certainty of the Greek rescue receded somewhat over the past week. Reasons include:The Restructure Debate
The growing public rift between those who oppose any Greek debt restructure led by the ECBand France, and those who favor it , led by assorted German policymakers and parliamentarians, most notably German Finance Minister Wolfgang Schaeuble.
- Those who oppose it argue that any restructure risks detonating a spreading global financial crisis as all other PIIGS nations would be effectively shut out of debt markets and soon forced into default, the European banking system would be destabilized as the wave of PIIGS defaults sends untold numbers of large TBTF banks into insolvency.
b) For anyone who naively hoped the US banking system would not also be at risk from a PIIGS default, John Mauldin just came out with an article based on BIS data showing how US financial institutions’ exposure (mostly as sellers of insurance against PIIGS bond default to EU banks) is close to $200 bln, a bit more than that of French, a bit less than that of Germany.
- Those favoring restructure don’t deny the above risks but rather argue it is inevitable anyway and delays only increase the ultimate cost. Thus EU energies would be better spent if focused on how to restructure while minimizing contagion risks.
In a great article by Mish Shedlock here, he notes:
- Constitutional challenges to German bailout payments now being heard in German courts
- Potential withdrawal of bailout support from Finland, because the yet formed new coalition may be forced to include anti bailout parties which control over a third of the Parliament.
- Reports that Greece may be unable to pass the austerity measures required for receiving its bailout
Passage of the Portuguese bailout is far from guaranteed. Like Greece, it isn’t the size of the default but rather the contagion risk it presents. In addition to posing the same risks to market confidence that make a Greek default so dangerous, a Portuguese default would be particularly destabilizing for Spain, which has far too much debt to be covered under any existing scheme. As noted in the chart below from Goldman Sachs (via Reuters), Spanish exposure to Portuguese debt alone is over 6% of Spain’s GDP, which is the third largest in Europe.
Thus the above chart offers to potentially chilling ramifications:
- If Portugal defaults, Spain, already struggling under a growing national and regional debt load, is at real risk of losing market confidence and also being shut out of debt markets and in need of aid that is unavailable given the size of Spanish debt>
- If Spain becomes a default risk, most of the EZ’s core funding nations shown above risk destabilization given the size of Spanish debt as a percentage of GDP (ranging from ~4% for Switzerland to ~10% for Holland).
Some of this debt may be insured. Per economist Kash Mansori (via John Mauldin) about 30% ofPIIGS bonds is insured against default, over half of that insurance issued by US institutions. However 70% of this debt isn’t insured, and uncertainty over who is at risk would be enough to spark crisis in confidence, financial markets, and interbank lending in Europe and the US, which should be enough to hit the rest of the world as well.More Pain From Spain?
Spain is in no position to take a hit like that and expect to retain a lifeline to global credit markets, which it already may be losing. Just this past Friday morning Banco Santander, considered the most stable of Spanish banks, held a failed bond auction. This was more a reflection of weak creditworthiness of the regional bonds involved rather than the banks itself, but ongoing revelations of hidden regional and municipal debt are the key threat now to confidence in Spain’s credit worthiness.Core Melting Down?
Germany and France, the two largest economies in Europe, both reported sharp declines in their respective total trade balances for April. These are the 2 primary funding nations that need to stay healthy for the bailout scheme to work.Greek Cooperation In Jeopardy?
Maybe it was just part of the ongoing brinksmanship meant to squeeze a better deal from the Troika (IMF, EU, ECB), but this past Friday Greek PM Papandreou again calls for a referendumbefore major reforms become law. It is unclear about whether he is talking about austerity measures demanded by the EU/IMF which would surely fail any nationwide voteTime Running Out For Greece: June 24 Deadline
Given the risks of a global financial crisis we still believe that, even with some scares along the way, the Troika will shrink back from the abyss and pay up in order to buy some time to figure out a relatively ‘orderly’ Greek default at some point in the next 24-36 months at most. However they have less than 12 days left until the June 24th EU leaders monthly meeting, which is the supposed deadline to finalize a Greek deal. If they don’t succeed, markets will begin to price in a far higher chance of default on the approaching next Greek bond payment. That’s not a lot of time, and means things can yet go wrong as long as they don’t go right before June 24th.Beyond The US And EU: Gathering Evidence of Global Slowdown
Suddenly markets don’t ignore the accumulating bearish fundamentals. After months of ignoring signs of slowdown in virtually every major economy, over the past weeks financial market have indeed taken notice. Perhaps it was the approaching end of QE 2, or the return of the threat of Greek default and ensuing EU bank insolvency. We’ve cited many articles summarizing these. Seehere for last week’s post in which there were links to many of them. For a few new ones, seehere.THE TECHNICAL PICTURE
Of course, much of the above isn’t all that new, yet market have been able to ignore these fundamentals for months. For making actual trade/investment decisions we must consider the charts.ON THE DAILY CHART
Looking at the S&P 500 as a barometer of overall risk assets, what do we see?
S&P 500 DAILY CHART COURTESY ANYOPTION.COM 05jun12 0457The Bearish
The index sits right on its 200 day EMA around 1270, and has closed below its 23.6% Fibonacci retracement level set from its April lows.
Both 10 (blue) and 20(yellow) day EMAs crossed below the 50 day EMA (red)
The index has been in the DBBSZ, the Double Bollinger Band Sell Zone, (area bounded by the lower 1 and 2 standard deviation Bollinger Bands (the lower green & orange bands)) since start of month. For details on the significance of this see: 4 RULES FOR USING THE MOST USEFUL TECHNICAL INDICATOR, DOUBLE BOLLINGER BANDSThe Bullish
Despite the above, this 6 week decline has been orderly and slow, and is still well less than 10% from its June 2010 low. So thus far it is technically just a normal pullback within the overall uptrend from March 2009 until proven otherwise.ON THE WEEKLY CHART
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