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US Treasuries Rise As Markets Wait For Currency Traders To Move The EUR/JPY Higher Or Lower


Corey Rosenbloom writes in article Stocks Up, Volume Down, Momentum Down, Careful This is NOT the picture of bullish/breakout strength, and the multiple divergences are non-confirmations that challenge you to be much more cautious in your trading – resolutions of multi-swing negative divergences can be harsh to the downside… but it’s difficult to pinpoint exactly when the market will tumble – just know that risk is high.

His charts show declining volume and weak momentum — it’s a zombie stock market, as there is no blood pressure or heart beat.

And he references his June 7, 2010 article Key Edge of Cliff Level to Watch in Russell 2000 June 7 when the Russell 2000, $RUT, traded at 631, that is on the edge of the $630 Abyss.

Today the $RUT is trading  at 665, that is just above the $660 Ledge, and the $600 Ledge.

The chart of Spain, EWP, and the Russell 2000, IWM shows these to be buoyant on a rising and now steady EUR/JPY, ever since June 7, 2010.

Spain traded slightly up. The Russell 2000, IWM, closed up slightly at 66.76. The overall stock market, VT, closed unchanged.

Today, regional banks, KBE, and the too-big-too-let-fall-banks, RWW, traded unchanged. While many of the largest U.S. banks easily repaid billions in TARP aid, more than 600 smaller banks still hold $130 billion from the TARP program, created at the height of the financial crisis, reports Reuters/CNBC in article more than 90 banks miss TARP payment.

The European sovereign debt crisis has created an investment demand for gold, and a presumed flight to safety in US Treasuries, as IEF, TLT, and ZROZ, causing these debt investments to rise today near their May, 25, 2010 highs; TIP did make a new high, making the Direxion 300% inverse of 30 Year US Treasuries, TMV, fall  towards its June 7, 2010 low of 45.49.

I had thought that these debt instruments had reached their highs, but as the stock market turns down, and other sovereign debt looks to attractive, even US debt could move higher, before it too turns lower.

Tyler Durden relates in article Pimco Holdings Of US Government Debt Surge, Its European Debt Experiment Is Now Over: The beneficiary of this adjustment were US bond holdings, which surged from 36% to 51% of all holdings, or a MOM increase of over $35 billion! This represents about a third of all (settled) US bond issuance in May. Who needs QE2 when you have Pimco. Another notable observation is that the fund is now once again acting on margin, with a -4% net cash position. The last time the fund was on margin was in October 2009. Lastly, TRS has been slowly shifting further out in duration, with holdings of 5 Year or longer maturing notes rising to 56%, compared to 51% in April, and a low of 8% in November 2008, just after the Lehman bankruptcy.

The chart of $TYX:$TNX, shows a rising yield curve since April 26, 2000, indicating risk aversion to investing in longer out US Debt. The rising yield curve presents a headwind for the credit sensitive Russell 2000 stocks, IWM as does the widening interest rate spread between junk debt and US Treasury Debt; and also corporate debt and US Treasury Debt.

The TED Spread Is Making A Sharp Move Off Its Highs remarks Gregory White of The BusinessInsider. The chart shows that fall might be short-lived, and could lead to another dramatic increase in the market stress indicator, just like it did in March, April, and May when the European sovereign debt crisis commenced.

April 26, 2o10, marked the tipping point into global debt deflation, when short sellers successfully sold the markets short, and equities fell in value; until on June 7, 2010 when the currency traders ran the Euro, FXE, higher, and took the EUR/JPY, higher, causing European, FEZ, Spain, EWP, Austria, EWO, and Italy, EWI, to soar; as well as to make the Russell 2000, IWM, rise.

Currency traders move the stock markets, so we must await their decision on the EUR/JPY.

Tomorrow is the expiration of quadruple witching, when four different types of contracts expire, including option contracts.

And tomorrow we will know the outcome of the EU Finance Leaders and State Leaders Summit which will  the Herman Van Rompuy led task force will announce the establishment of the EFSF Agency with seigniorage authority to create Eurobonds, guaranteed by the participating eurozone nations for the purpose of assisting nations in sovereign debt distress. 

Simon Taylor of reports that draft conclusions for the summit say that governments agree on the need for sanctions for breaching the limits on deficits and debts. Some sanctions, including losing EU funds for economic development, already exist but have never been applied because of a reluctance to punish member states having difficulties with their finances.

Merkel has been pushing to strip irresponsible member states of their voting rights, a move that would require treaty change. Nicolas Sarkozy, France’s president, said after a meeting with Merkel in Berlin this week that he was prepared to support treaty change if it was needed. But a new round of treaty change is strongly opposed by many EU governments because of the difficulties in getting the Lisbon treaty into force. The UK Government has said it will veto any treaty changes involving a transfer of powers to the EU’s institutions.

Van Rompuy’s taskforce will continue to meet to discuss other aspects of economic governance and will present its final report in October. In the meantime, the Commission will prepare draft legislation needed to put any agreed changes into effect. Van Rompuy wants EU leaders to discuss the conclusions of the work at a summit meeting in October.

Fitch Ratings has warned that it may take massive asset purchases by the European Central Bank to prevent Europe’s sovereign debt crisis escalating out of control  reports Ambrose Evans-Pritchard in his June 17, 2010 Telegraph article. 

A smooth auction of €3.5bn of Spanish bonds offered some respite yesterday after a week of stress on the EMU periphery, but Spain had to pay punitive rates. The average yield on 10-year bonds was 4.86pc, a near record spread of 220 basis points over German Bunds. Silvio Peruzzo from RBS said the auction does little to help Spanish banks and firms that have been frozen out the debt markets and face a funding crunch. “The ECB needs to act before contagion becomes endemic. Spain’s banking system in at the heart of an ice-storm and there is a risk of ‘sudden stop’ if they can’t roll over debt.

Fitch said European banks must refinance nearly €2 trillion of long-term debt by the end of 2012 in an unfriendly market. “There’s an awful lot of debt coming due in 2011 and 2012, and that is becoming a concern,” said Bridget Gandy, the agency’s banking expert. Smaller banks have put off refinancing in the hope that spreads would fall and are now caught in a vice. Mrs Gandy said the situation could turn serious if global growth falters, tipping Europe into a double-dip recession. David Owen from Jefferies Fixed Income said the eurozone may start contracting again in the second half of the year. He said the “core problem” haunting the European debt markets is that investors have little faith in the EU strategy of forcing states to carry out draconian cuts in the middle of a recession.

Mr Owen said these countries need sustained growth to claw their way out of debt-deflation traps, and that will require fully-fledged quantitiatve easing by the ECB, and drastic currency depreciation. “If the euro falls to parity or down to 80 cents against the dollar, we would start to see a solution,” he said.

A Bank Run in Spain and Its Destabilizing Ramifications for the Entire EU reports Robert Wenzel of EconomicPolicy Journal. 

Today, the 200% inverse of the Russell 2000, SJH, closed up 0.5%. When the stock market turns down, this is going to be a bear market leader as it shorts the small companies which are critically dependent upon a stable and reliable credit market that provides an unfettered flow of capital at low-cost.  

In as much as we have entered into debt deflation, the investor should know that debt deflation is consequence of credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

One immediate consequence of debt deflation is reported by Mike Mish Shedlock: Philly Fed Business Index Dramatically Slows, Lowest Reading in 10 Months.

And Mary Schlangenstein and Mary Jane Credeur of Bloomberg report stagflation: FedEx Outlook Trails Estimates As Employee Costs Rise

Personally, I believe the currency traders will acknowledge the sovereign debt crisis has passed the point of no return, and they will call the EUR/JPY lower, causing disinvestment from stocks, VT, and base metals, DBB, as well as oil, USO. 

Gold, GLD, rose today to an all time high, nearing 122.  Gold mining shares, GDX, popped higher to 52.96, approaching their May 11, 2010 high of 53.60.

Disclosure: I am invested in gold coins