Part 1: Prior Week Market Movers & Their Lessons For the Coming Week
The following is a weekly strategy guide for traders and investors, covering 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. Perfect for those seeking a summary of prior week market movers & their lessons for the coming week and beyond, & a look at likely coming week market movers.
Looking at our barometer of risk appetite, the S&P 500, its weekly chart shows we’re ending the week lower (NYSE:B), and so confirms last week’s third lower high since May (NYSE:A) start of the next leg lower of the current downtrend, and also confirms the bearish hanging man (A), yet another sign of more downtrend ahead.
S&P 500 WEEKLY CHART 13 JUNE – 11 OCTOBER 2011 01 NOV 12 1953
Points To Note:
The 61.8% fib retracement of the prior downtrend from early May to late August 2011 (shown by the dotted red line) appears to have held as resistance.
We have strong support around 1200 comprised of 4 kinds of support indicators:
- The 1200 price level, itself a big fat round number that proved to be firm resistance during August and September
- The 20 (yellow) weekly EMA around 1220
- The 50 (red) weekly EMA around 1220
- The 38.2% fib retracement of the aforementioned downtrend, which has held as support for the past month.
So until this level is decisively broken or we get some great news, we assume the index remains bound within the 1200 – 1270 range until further notice.
If we zoom in on the daily chart (the past week highlighted in blue), we see that after wild fluctuations they closed slightly higher.
S&P 500 DAILY CHART 02 nov 122247
What was behind these moves?
EU: Markets Fell, Then Rose, On Italian Debt Prospects
Markets continue to move almost exclusively on EU developments, though this week the clear primary focus was now Italy, not Greece. In particular, benchmark 10 year Italian debt flirted with 7%, the unsustainable debt cost that signaled bailouts for Greece, Portugal, and Ireland. Because there is no cash available to bailout Italy, this presented a truly unsolvable default threat that would bring the collapse markets under a wave of resulting sovereign and bank defaults. Risk assets plunged as Italian debt yields soared, but markets stabilized somewhat Thursday when the latest Italian bond auction went off as well as could be expected, beating already low expectations. Stabilization continued Friday when Italy passed its latest budget law, and rumors of ECB intervention fueled a serious Friday rally in Europe and the US. That was it, all about Italy this week.
After the failure of EU leaders to devise a credible rescue plan that was expected in prior weeks, nothing this week really changed the fundamental reality that the EU is sliding towards a wave of defaults and a global crisis that will likely go global unless someone steps in as lender of last resort. No one is stepping up at this time, and won’t until we’re at the edge of the abyss and necessity again becomes the mother of invention, and suddenly cash is found to at least buy more time. Probably.
A side note to the ongoing crisis was the question of who would replace departing Greek and Italian PMs. Both were ultimately replaced by technocrats seen as more fiscally responsible though we question whether either will be able to make meaningful improvements given the situations they’ve inherited:
- -They have debts they can’t pay
- -They’ve anemic growth that under the best of circumstances would take years to improve. However with the EU still in austerity mode achieving accelerated growth is that much harder.
- -No credible rescue plan yet. Cutting through all the commentary, here’s where we stand. Everyone is suffering from bailout fatigue. Debtor nation populations are restive and likely to vote out anyone imposing yet more austerity. Creditor nations are unwilling to endanger their own fiscal health by taking on more spending or debt to help the GIIPS. There is no more money coming at this time. That situation may change, but only when we’re again at the edge of economic collapse and suddenly leaders get more flexible as they assume their voters understand that they’re doomed if they don’t accept more austerity (for debtors) and bailout spending (for creditors). At that point one way or another GIIPS bonds get bought, their debt monetized, and the EUR dives, though most risk assets will get at least a relief bounce. The most immediate problems with the latest too little, too late, too vague plan:
- -Haircuts may not even help Greece. According to a FT editorial, new Greek PM Papademos believes haircutting Greek debt 50% won’t help much because most Greek debt is held domestically. Whatever benefit the government gets will be used to prop up local banks that have taken losses on that paper.
- The EFSF bailout fund is utterly inadequate for the default threats at hand, nor is there a coherent plan for how it will work. Two plans are being considered, see here for more details on them:
- Guaranteeing the first 20%- 30% of bondholder losses: we doubt that will provide enough comfort to convince investors to continue buying GIIPS bonds
- Using an SPIV funded by the IMF and private investors. This approach is riddled with technical delays and obstacles. See here for details
- See here for details on why the current rescue plan is doomed to fail.
Hopes For ECB Intervention Along SNB Model As GIIPS Bond Buyer Of Last Resort Spark Late Week Rally
Risk assets stabilized Thursday and rallied strongly Friday despite an apparent lack of news. However per Cullen Roche, what was driving markets higher was a big rumor that the ECB would step in as buyer of last resort, the very move that many, like Nuriel Roubini have said is the only hope for the EU. Buyers are betting this happens, drives bond yields down, eases fears of imminent EU defaults and sends markets rallying.
More specifically, the hope is that this won’t be just another cash dump, but rather one in which the ECB announces an interest rate cap for various countries, telling the market that if a given-country’s bonds hit a specific rate, then the ECB will intervene.
The appeal of this approach is that it promises a much cheaper solution than the random bond buying it’s done thus far. The hope is that IF the market tests the ECB and sees firm resolve to defend the set GIIPS bond yield ceilings, then speculators will back away and yields will fall without the ECB actually doing much bond buying. Instead, that mere threat of intervention will be all that’s needed to
- scare off speculators,
- keep GIIPS bond yields at affordable levels and reduce default risk
Voila, an affordable way to keep credit access available to the periphery and ease fears of imminent defaults.
This approach essentially attempts to copy Switzerland’s recent success at suppressing the CHF’s rise against the EUR, which was hurting Swiss exports. The Swiss National Bank (SNB) found last year that just buying up Euros wasn’t enough. Rather, it added the explicit commitment to intervene whenever the EURCHF hit 1.20. When markets tested that level and the SNB proved true to its word, speculators backed off without the Swiss needing to spend as much as in the prior failed attempts. See here for further details.
The late week rally reflected the belief that the ECB will take the same encouragingly cost effective approach. Whether it does or doesn’t could be the big story for the coming week and beyond, possibly igniting a multi-week rally or plunge new hope or pessimism.
Not Market Moving But Noteworthy
NEW SNB INTERVENTION FOR CHF
Late in the week the CHF plunged vs. both the EUR and USD after the SNB’s Jean-Pierre Danthine stated that the bank is prepared to take further measures to weaken the currency. There are rumors that the SNB wants to aid Swiss exports by moving the EURCHF floor from CHF 1.20 to CHF 1.30.
NEW DEFAULT THREATS?
Slovenia’s 10 year yields continue to spike, approaching 7% and a record 535 bps spread to German bunds amidst talk of a credit ratings downgrade as its Parliament rejects the latest austerity measures.
Though not a Euro-zone member, Hungary could be the next European sovereign debt trouble spot. A T-bill auction Friday had a bid-to-cover ratio of just 1.0, and wound up closing at a 6.79% yield.RBC warns Hungary, which has a debt/GDP ratio around 80%, could be “caught in a vicious cycle when global economic/financial conditions deteriorate.”
A REAL FRENCH CREDIT DOWNGRADE THREAT
Though S&P’s downgrade of a France was attributed to nothing more than a computer glitch, ratings firm Egan-Jones looks ready to actually downgrade France. Sean Egan tells Bloomberg Radio he thinks France’s AA- rating is “heading south.” Note that this would threaten current EFSF bailout fund bond sale hopes, as these rely on France having a top credit rating.
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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?