A trading strategy overview of primary market moving forces from the prior week and their lessons for the coming week, and likely coming week market movers for traders of forex, indexes and commodities via spot market and binary options instruments.
After weeks of almost obsessive focus on Greece, by Tuesday markets started to price in a solution. However, waves of news about slowing global growth took over to keep risk aversion alive. The focus on stagnating growth is legitimate. However, calming about the EU debt crisis appears premature, as discussed below.Greece & The EU’s Real Endgame
From Tuesday onwards there was a growing easing of fears on the Greek Crisis, when reports started emerging that the “Troika” (ECB, IMF, EU) were close to deal with Greece that would avoid both restructure and insolvency for at least the coming years. The calming continued, as reflected in the EUR surge as details started to emerge.
Key points known thus far include:
- Greece now needs another €60 billion to cover its financing needs for the next two years.
- About half will be covered by new bailout money mainly from the European Financial Stability Facility, the current bailout fund. The advantage of using the EFSF for a second bailout is that, unlike bilateral loans from other EU nations used in the first bailout, it wouldn't require parliamentary approval in places like Germany, where it's very unpopular.
- Of the remaining €30 billion to €35 billion, about half could come from privatizations and out of the Greek budget.
- That leaves €15 billion to €20 billion to be obtained from the private sector through "voluntary" repayment deferrals by bondholders.
- European officials have been talking about how they might encourage such deferrals, including through providing "preferred" status to those who agree to defer, protecting them somewhat against the prospect of future losses. They've focused on Greek banks as the most persuadable holders of Greek bonds.
The EU's Real Endgame
Yet even if the second bailout carries it to 2014, the question is what will happen then?
- A forced restructuring of private bondholders, with the risks of contagion and a new leg of the crisis? It seems hard to imagine that EU policy makers will be any more willing to risk destabilizing the EU and global banking system then than they’ve been thus far. Many major EU banks, including the ECB itself, could be rendered insolvent by a Greek default alone, never mind those that could follow as panicked bond markets send borrowing costs for PIIGS nations out of reach.
- Continued official financial support, which will make Greece a ward of Germany and its friends? Then as now, hard to believe that voters on either side will accept more austerity or bailouts. Indeed, the biggest risk to the EU over the coming years is rising political opposition that could pull enough nations out of the scheme to force its collapse.
Both alternatives are risky if not impossible, so what’s the likely endgame that policymakers have in mind? The best explanation I read came from and article by Gregory White of businessinsider.com:
Why another bailout when everyone knows that the country can't pay its bills?
The reason for the further kick of the can is that it pushes out the costly and dangerous restructuring event until 2013, when the European Stability Mechanism, or ESM, comes into play. That's the successor program to the ad-hoc European Financial Stability Fund, which has thus far been used to support debt troubled states in Europe.
The reason leaders want to get Greece to the ESM stage is that it entails some sort of orderly restructuring of the country's debt, where private creditors will take part in the deal. There is the potential that the ESM could swap its debt to creditors in exchange for the sovereign debt they are holding. Essentially, that's a eurobond in exchange for a Greek bond, in everything but name. This has not yet been agreed to, and will likely garner significant political opposition.
In 2013, collective action clauses will be installed in the sovereign debt of member states. This will allow private bondholders to vote on what they will accept in exchange for their current debts. German Chancellor Merkel has expressed support for such measures, which will make it easier for eurozone leadership to discuss restructuring at the least, and debt replacement if eurobonds come into existence.
But here's where it gets interesting. By 2013, most Greek debt won't be owned by the private sector (banks, bond funds, individual investors), but rather the IMF and European Union.
So, if Greece gets to 2013, a restructuring event or eurobond swap would really just hurt the ECB, EU, and IMF, saving banks and private creditors the costs and the region contagion risks.
Viewed this way, the desire to kick the can yet again seems more rational. By deferring the EU crisis until 2013, the EU gets a favorable change in the rules, more time to clean up its act, and critically, provides its banks a chance to further decrease their PIIGS bond exposures.
Remember, protecting the stability of the EU banking system that holds the bad bonds has always been the chief motive behind EU actions throughout the debt crisis.
Premature Calm About The EU Debt Crisis?
The biggest risk remaining is whether the EU leadership behind this plan can sell it to their electorates and stay in power long enough to implement it. Every election held in the past year suggests a real chance that regimes may be elected with a mandate to oppose further bailouts or austerity. Then what happens?
Bad Data: This Week Markets Didn’t Ignore It
Despite the threat of a global financial crisis receding a wave of bad economic data kept the pressure on. Highlights include:
- Tuesday: The Case-Shiller US housing index showed a sharper than expected fall in home prices in March. Then Chicago PMI came in bad. Then Consumer Sentiment was ugly. Then the Dallas Fed Index dipped into negative territory. The slowdown in the economy is clearly confirmed.
- Wednesday: Chinese PMI was below expectations. So was Aussie GDP. Eurozone PMIs were consistently disappointing. The UK was similarly ugly, as a double dip seems now all but confirmed. US data continued to support the doomsayers. The ADP jobs report was a disaster, which got everyone nervous about Friday's Non-Farm Payrolls report. The US factory ISM added to the dour picture. Suddenly QE 3 was a growing possibility.
- Thursday: US April factory orders and first time jobless claims were also negative
- Friday: The climax came with US monthly jobs reports that were every bit as bad as the earlier ADP and Mfg ISM figures suggested, with only a 54K increase in jobs vs. the expected~161k (which itself was a downward revision).
As bad as everything else was, the US NFP miss was the heartbreaker. Stagnant job creation in the world’s largest economy means stagnant consumer spending (~70% of US GDP). In addition to confirming a flattening in the already weak US recovery, it killed hopes for any real tightening from the Fed any time soon and means the USD is to continue to be weak. Oh yes, and US housing has officially double-dipped, as both lagging and leading indicator of employment weakness.
Lessons For The Coming Week
Before considering next week's likely market movers to watch, let's consider what we learned from last week that can help us set strategy for the coming week.
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