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COMING WEEK MARKET MOVERS: US CREDIT DOWNGRADE VS. ACCELERATING EU CONTAGION

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A trader’s strategy guide to prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options

See part 1 for weekly review of likely market movers for the prior week, lessons and ramifications here.

As we saw in Part 1, the very bearish fundamental picture finally hit market and is now starting to be reflected on the charts.

COMING WEEK TOP MARKET MOVERSMARKET REACTION TO S&P DOWNGRADE OF US CREDIT RATING FROM AAA TO AA+

The downgrade of the US’s credit rating may rattle already nervous global asset markets. The big risk is that, contrary to expectations, this actually sparks some serous USD selling as winds up creating some kind of “credit event” (major institution suddenly insolvent). That’s not expected, for a variety of reasons. Primary among these is that, as we noted last week,

  • There are few assets liquid enough for big players like China or other large sovereign wealth funds to park their money.
  • Any major selloff obviously would devalue the remaining holdings of these large funds faster than they could sell them.
  • The move by S&P was not unexpected, given how little new deficit plan actually does to reduce the US’s massive deficit, the plan is a mere band-aid, not long term solution that credit agencies would have preferred. The US is still lacking the political will to make real headway on its deficit.

So while we do expect reduced USD demand over time, we don’t expect to see a major USD selloff. Moreover, if markets are even slightly afraid of the chance of the following potential market mover happening, the US credit downgrade, and virtually everything else, will be a secondary.

FURTHER DEVELOPMENTS IN EU SOVEREIGN DEBT & BANKING CRISIS: GERMANY TO GIVE UP ON THE EU?!

There is plenty of potential in the EU’s spreading contagion to continue dominating market movements.

For example, the German paper Der Spiegel reported (via zerohedge.com) that German PM Merkel’s advisors are opposed to any German participation in a bailout for Italy. Key points these advisors make:

  • Italy Too Big For EFSF To Save – Spiegel
  • Doubts Whether Tripling EFSF Would Help It Save Italy
  • Italy Must Make Savings, Reforms To Exit Crisis – Spiegel
  • Italy Debt Guarantee Could Raise Doubts About Germany’s Finances – Spiegel
  • EFSF Should Only Help Small, Mid-Size Countries – Spiegel

HOLY &@#&*!!!!

If Germany now opposes expanding the EFSF bailout fund to a size that could backstop Spain and Italy, then that means bondholders of these nations have nothing to rely on but the ….gulp! credit worthiness of Spain and Italy!!! That means more rising GIIPS-C ( C for Cyprus, latest bailout bad boy) bond rates, which are already approaching   7% for 10 year bonds, a rate that has typically forced other nations to concede that they can no longer afford to access capital markets and need a….bailout. Unfortunately both Italy and Spain have far too much debt for the current EFSF to cover, so if Germany, the biggest contributor, is bowing out, then the EZ and EUR as we know it kaput.

Anyone who thinks China will gladly step in and fund a $5 trillion EFSF shortfall should read the following article from Reuters, the key point of which is:


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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

 
 
 
 
 
 
 
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