E-Mini S&P 500: Euro Shadow Slows Creating Macro Lows

by: DeWayne Reeves

The E-Mini S&P 500 trended lower on concerns that Greece may leave the euro FX and return to the Drachma. Fitch's credit rating agency commented that if the ailing country left the EU, all the European Union countries would run the risk of downgrades. Banking concerns have been quietly preparing for the return of the Drachma. Some banks actually never really erased the currency from years ago. The problem with that would be the exchange rate and exposure of the banks with loans in Greece. An exit plan has never actually been publicized, so the feasibility of the plan is unknown.

Greece has been in chaos since the May 6th election where parliament had been divided between a bailout deal and potential default. The contagion fears have been magnified perhaps because no one has ever exited the euro FX and it is difficult to foresee a manageable departure. The European Union (EU) has supported Greece through two bailout rescues and reforms. The EU anticipated that the elections would give them new governments to negotiate with, but the indecisive results were not expected.

The major keepers of the Greek debt are the International Monetary Fund (IMF), the EU and the European Central Bank (ECB). Greece also may run out of money next month and without any government in place to negotiate any rescue funds, the country may actually feel the effects of a severe recession. Greece has about $430 million euros of bonds maturing on Tuesday and must decide on the potential default or payout.

Article 50 of the Lisbon Treaty deals with any withdrawals from the EU specifying that an agreement with the other EU members must be drawn up to be approved by the majority and also by the European Parliament. The Euro Zone contracted 0.3% in the fourth quarter.

The Spanish and Italian yields have increased to non-sustainable levels in light of the new developments. Spain had been overwrought with bad housing loans in a banking system needing reforms. The Spanish ten-year bonds were up to 6.32%. The default insurance on the bonds also rose. The Italian bonds were at 5.94%. Industrial production in the Euro Zone decreased 0.3% in March. On the other hand, German output was up 1.3% in March. Spain's output decreased 1.8%.

The EU leaders are to meet in Brussels on May 23rd to discuss potential growth and reforms, but expectations are for little, if any, change. Even in the midst of all the pessimism shrouding the euro FX at this time, Poland has expressed interest in joining the EU. China chose to decrease the reserve capital required by banks in an effort to evoke further growth. The move was looked at as another negative for the market to absorb. China had been thought of as the power growth economy and the reality of China slowing is quite bearish for the market. The slowed growth has brought oil prices down, but it still affects investor sentiment. The MSCI measure of world stocks was down 1.5% to 310.43.

Iran is still in talks with the European Union Foreign Policy Chief Catherine Ashton who hopes that the nuclear research program is at the beginning of the end. They meet in Bagdad on May 23rd to resume negotiations. Iran is hoping to reduce the sanctions placed on it by the US and the EU. The financial constraints have forced Iranian business to be bartered in gold and rupees as the Iranian banks have even been banned from SWIFT transactions.

The International Atomic Energy Agency is attempting to gain access to Parchin, the nuclear complex southeast of Tehran. The agency indicated in one report that Iran had built a large object according to satellite images that is suspect of high explosives. It is thought that Iran is detaining the talks in order to clean-up the site. The energies have come down in price as a result of increased production by Saudi Arabia and some global growth slowdowns. The Middle-east is still vulnerable to conflict until a resolution has been reached.

On the stock side: JP Morgan Chase and Co. (NYSE:JPM) was down 3.03 % to $35.84. Citigroup Inc. (NYSE:C) was down 4.11 % to $28.14. Bank of America (NYSE:BAC) was down 2.25 % to $7.37. Alcoa Inc. (NYSE:AA) was down 1.43 % to $8.93. Boeing Co. (NYSE:BA) was down 0.57 % to $73.13. Caterpillar Inc. (NYSE:CAT) was down 1.98 % to $93.61. General Electric Co. (NYSE:GE) was down 2.26 % to $18.58. Halliburton Co. (NYSE:HAL) was down 0.75 % to $31.59. Hewlett Packard Co. (NYSE:HPQ) was down 0.73 % to $22.98. SPDR Select Sector Fund - Financial (NYSEARCA:XLF) was down 2.09 % to $14.49.

E- Mini S&P 500 Chart.

Tuesday, what to expect: We maintain a bearish bias unless the E-Mini S&P 500 penetrates $1394.25. Today, we anticipate an inside to lower day. Monday's range was $1351.00 - $1333.25. The market settled at $1334.25. Our comfort zone or point of control for this market is $1341.25. Our anticipated range for today's trading is $1347.50 - $1323.50.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.