The following is an abridged version for a quick review/preview of markets for the coming week. See The Week Ahead March 1st -5th : Beware These Likely Market Movers for detailsINTRODUCTION
S&P 500 01 FEB 27The Prior Week
Little changed as markets grope for direction from the forces discussed below.The EU debt crisis remains the overwhelmingly big story- Greek bond fiasco may signal PIIGS already beyond help
Still no concrete plan from the EU, as Northern Europe leaders are reluctant to commit political suicide, with their voters in no mood to pay for Greek mismanagement, lying, corruption, and tax dodging. Greece is virtually certain to default within a month without help.
The alternative to a bailout may be worse. However, it may also be unavoidable anyway. Even if Greece could be bailed out for now, could Italy and Spain, with their much larger debt loads? Once one of the PIIGS block defaults, the others are likely to be shut out of bond markets, which will seek compensation for risk at rates too high for the PIIGS to afford.
Is the real plan is to arrange for ‘orderly’ default, simply because it is likely inevitable?
In Europe, the sovereign debt crisis steadily metastasizing as long as it is going untreated, and although the spot light remains on Greece, contagion fears are lingering as both Spain and Italy owe far more and are not getting their deficits as percentages of GDP down.
Up to €5B in 10-year Greek bonds were expected to be priced this week in a key test of investor appetite, but the 10-year Greek spread versus Bunds deteriorated back towards the 350bps area, forcing Greece to postpone the sale. Is Greece, and the PIIGS block, already beyond saving?
Time is running out, as the Greek PM himself confirmed that the country's borrowing needs are only covered until March.
Meanwhile, neither debtors nor potential rescuers have shown the will to bear the pain associated with any realistic solution.
If any EU member defaults on its bonds, the resulting rise in risk aversion could send EU sovereign bond prices plunging and demand yields soaring to rates these countries can’t afford, effectively shutting them out of the bond markets and setting off a wave of defaults. Greece’s de facto failure to sell bonds may mean PIIGS past the point of saving.
If Lehman Brothers’ collapse was enough to ignite the market crash in the fall of 2008, imagine how markets will react to an entire chunk of the EU rolling over?EU’s Pain is America’s Gain
The US continues to benefit from the EU debt mess, which continues to keep fear levels high, and demand for safe haven US Treasuries brisk, questions aside about who is actually buying. Yields moved markedly lower despite $118 in coupon supply this past week.
Bond prices were also buoyed by a swath of generally softer than expected economic data.
This may be fine for now, though the consequences of a wave of Southern European defaults could spark increased borrowing rates for all governments and easily crash asset markets once again. We question whether the rest of the world will be able to stand aside. See Here's Why Southern Europe Will Not Be Allowed to Default for detailsSTOCKS
Markets whipsawed lower then higher this week in an atmosphere of uncertainty as conflicting headlines out of Europe on Greece and mixed US data kept trading unsettled.
For the week, the DJIA dropped 0.7%, the Nasdaq declined 0.3%, and the S&P500 fell 0.4%.Summary Recap For the Week – See Full Version
Crude oil recorded the first weekly decline following rises over the past 2 weeks. We expect oil to remain between $60-$80 for the foreseeable future, though extreme bouts of fear or concerns about supply from geopolitical tensions could send it beyond these ranges.
On weekly basis, gold price slipped -0.265 to 1118.9.
Although we remain long-term bullish in gold, the precious metal is expected to be range-bounded in the near-term.
Moreover, global inflation remains benign, undermining demand for gold and oil, as both are used as US dollar hedges.FOREX
Despite an optimistic start, by mid-week risk aversion came back due to the various developments cited above benefitting the USD and JPY (see full version link above for details). Slumping US consumer confidence, the Fitch downgrade of Greece's four largest banks, warnings of more EU credit ratings downgrades, the FDIC's troubled bank list and more dovish comments from the BoE were all factors.
US Dollar Weekly Outlook: Supports For Longer Term Upside Remain, Short Term Overbought Drop Possible
US Dollar Bias: Bullish
-Events: Mon-Personal Income, Spending, ISM Mfg PMI, Wed-ISM Non Mfg PMI, ADP Non-Farms Payrolls Thurs-Pending Home Sales, Fri- Non-farms Payrolls Change, Unemployment Rate
- US Dollar range trades with S&P 500 reflecting market seeking direction from EU debt resolution, China Growth. EURUSD ends week almost unchanged near 9 month lows above 1.3600. If there is an oversold bounce, attempt to resell around the 1.3850--3950 area.
- EURUSD long term average is 1.18, so easily could drop to that or lower as long as EU debt crisis remains unresolved
- Packed news week ahead, but USD could benefit from both good and bad news as both safe haven and also rise if jobs data raises expectations for tightening, rate increases
- EU debt mess still the primary USD driver barring major surprises in US economy
- EURUSDEuro Weekly Outlook: Greece Unable To Attempt Bond Sale – PIIGS Condition Already Terminal?
Euro Bias: Bearish
- Events: Mon- EZ Unemployment Rate, Tues- EZ CPI, PPI, Wed- EZ PMI Services, German Retail Sales, Thurs- EZ GDP, ECB Rate Announcement, Press Confr. Fri- German Factory Orders
- Rating agencies Moody’s, Standard & Poor’s warn of another Greek downgrade
- German business confidence contracts for the first time in 11 months through February
- EURUSD maintains its steady down trend, as Greece faces default w/in a month, yet EU lacks both plan and will for a real solution to Greece and other debt woes.
-One default should be enough to shut rest of PIIGS block out of bond market (if they aren’t already) as fear sends borrowing costs too high, sending all to default. Greece unable to sell bonds this past week due to high rates – are PIIGS already terminally ill?
- Even if Greek rescue successful, what about the much larger debts of Italy, Spain?Other FX
GBP: In the UK, the BoE discussed the merits of increasing the scale of its asset purchases program and kept talking down the pound ahead of a policy meeting next week. Sterling slumped of off highs around 1.575 as dealers absorbed the dovish comments from BoE testimony in parliament on Tuesday. Each of the BoE members seemed to mention the benefits of weak sterling over and over again and dealers took the point.
The BoE rate decision and comments this week could move pound, especially if more hawkish than expected, as the pound is due for some kind of bounce.
JPY: Japan reported consistently strong economic data this week. The yen also benefitted from risk aversion and the unwinding of historical carry trades, as well as chatter that the pending Dai-ichi Life IPO (set to be largest in Japan since 1997/98) was receiving overseas interest, which could generate short term Yen demand. Rumors that China may revalue the Yuan also helped hopes for Japanese exports, which would then become more competitive. JPY hit 11-month highs against the euro and pound pairs.
CHF: Moving Opposite the USD, with the EUR, as the SNB tries to keep the Swiss Franc from rising vs. the Euro in order to preserve Swiss exports to their prime market, the EU. PIIGS default may mean risk aversion overwhelms the SNB as cash seeks safe haven currencies.
Commodity Dollars- CAD, AUD, NZD: These do not lack their share of data, but are likely to move with the below market drivers for the coming week. The RBA rate decision and comments could be influential, but more likely to the downside unless it is bullish enough to suggest more rate increases coming.
Otherwise, the below listed market movers are likely to overwhelm local news from these economies.The Week Ahead Key Market Drivers To Watch – Bias To Continued Risk Aversion
The Big Two: EU Debt and US Jobs Data
EU debt related events remain a primary market driver, perhaps the only events risk that can seriously challenge Friday’s US jobs reports and related news leading up to it throughout the week. Be particularly alert for any attempts by the PIIGS to sell bonds, CDS rates on these, and news of rescue plans. No reason to expect any serious improvement, though something to buy time for Greece and the EU through the coming months is possible and relatively cheap, especially compared to the alternative.
As we’ve noted in The Week Ahead: The Key Idea For Profiting, the US Dollar could well benefit no matter what the outcome of US jobs reports and data leading up to it.Key leading indicators of the Friday result that can often move markets include: See The Week Ahead: The Key Idea For Profiting for details
Other Potential Market Moving Events
- Rate Decisions: The two central banks that have the greatest potential for altering monetary policy will convene this week in the RBA and BoE which could initiate new trends in their crosses and should garner the focus of markets.
- Data on Chinese growth: Including official and HSBC Manufacturing PMI
- Confirmation of a new general election in the UK could add uncertainty to the already fading British Pound.
Disclosure: No Positions