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Stocks: Prior day: Asia, Europe, US down. Today: Asia, Europe up on optimism about latest EU/IMF plan. Expect stocks and other risk assets to move up/down with news on latest developments. As noted in the conclusion below, very major questions remain about the feasibility of the plan, though its addressing ALL PIIGS debt, not just Greece, is a fundamental improvement.
- US Bonds: Up since Thursday on uncertainty as yields down from 3.6130% to 3.40%. Expect this trend to reverse Monday with overall rising risk appetite
- FX: Overall bias to safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GB in order of risk appetite appeal], few exceptions, most fairing as per their position on risk spectrum, but still the EUR worst.
- Main events: MON: USD Fed Announcement, AUD ANZ Job Ads, CNY Trade Balance, GBP: MPC Rate Statement, EUR Trichet Speaks and other follow up on latest EU/IMF plan TUES: CNY CPI, GBP Mfg Production, WED: AUD Home Loans, EUR German Prelim GDP, GBP Claimant Count Change, EUR Flash GDP, Industrial Prod, GVP Gov. King Speaks, Inflation Report, CAD Trade Bal. THUR: AUD Employment Change, GBP Trade Bal: USD Unemployment Change NZD Retail FRI: USD Retail, Core Retail, UoM Consumer Sentiment
Big Theme: Risk Appetite ON again: After the latest EU/IMF plan. See Conclusion below for remaining serious questions on details regarding implementation and enforcement, which if left unanswered threaten to derail the plan and nascent recovery from last week’s crash. Still, EU finally understands that it needed to deal with ALL potential defaults, not just Greece.
US: Down- Growing fears about the EU contagion threat pushed the best monthly jobs report in four years out of traders’ minds, sending stocks to their fourth straight loss, the stock market's worst weekly performance in one year, leaving the bellwether S&P 500 down nearly 10%, the overall stock market down about 6%, with declines coming on dramatically higher volume, indicating grave fear in the markets of more trouble to come.
US Bonds: Surprisingly, even safe-haven treasuries failed to secure support. The benchmark 10-year Note fell several ticks, such that its yield moved back above 3.40%.
Asia Stock Outlook: Up towards the close early Monday GMT on hopes that the latest EU/IMF ‘shock and awe’ rescue plan will ease bond market concerns about PIIGS block defaults and end threats of a wave of sovereign defaults and concomitant banking crisis, as seen late last week by the total halt in European interbank overnight lending, which threatened the stability of the European and global banking system.
European Stock Outlook: Up –At the open early Monday GMT, rebounding from falls on Friday, after European Union and the IMF announced on Sunday a $1 trillion fund to stave off the spread of Greece's debt crisis. Many details as yet unclear, but expect markets to rally in the short term on the news as fears of contagion ease for the near term at least.
Euro stocks gone bi-polar? Note the closing prices Friday and opening Monday in the table below. Markets may be up, but clearly not yet stable. Europe stocks closed down over 4%. It is currently UP over 4% at the start of Monday trading.
NB: Curb Your Enthusiasm: Many details are yet unknown and the additional spending to aid the PIIGS will likely be wildly unpopular with voters, so expect to see the usual backtracking on spending commitments by German leaders after Merkel’s regional electoral defeat yesterday, probably others from non-PIIGS nations who must face their own struggling voters. See Conclusion for just some of the serious open questions remaining.
Commodities Outlook: Up In early Monday trade GMT: Towards the end of Asian trading, up following overall risk appetite on easing short term concerns about sovereign defaults and banking crises in the EU.
Crude Oil Daily Outlook: Up– Futures higher as part of a general recovery bounce after last week’s panic driven selling with rising risk appetite despite rising US inventory data last week. Oil was down over 10% last week alone.
Gold Daily Outlook: Down- Futures down as some of the panic-driven safe-haven buying unwinds.
FOREX Daily Outlook: In Friday and early Monday trade GMT: Bias to risk fx as risk assets bounce on initial optimism and relief on the latest EU/IMF rescue plan which finally, finally, addresses default risks not just of Greece but of all PIIGS nations and thus the threatened wave of sovereign defaults as now even the smallest EU nations are now officially deemed too big to fail.
US Dollar Daily Outlook: Up on Friday but giving back gains Monday vs. the EUR, AUD, CAD, GBP down vs. the CHF, NZD down Friday but already recovered vs. the JPY. Predictably reversing course with market optimism on the latest EU/IMF rescue.
Euro Daily Outlook: Up vs. all except down vs. the AUD, NZD, recovering vs. CHF, generally gaining against all in early Monday trade
Yen Daily Outlook: Down vs. all, predictably, given the risk appetite selloff last week and new optimism on the latest EU/IMF plan.
British Pound Daily Outlook: Down vs. NZD, CAD, AUD, CHF, EUR, up vs. the JPY, USD.
Australian Dollar Daily Outlook: Up vs. the JPY, USD, GBP, CHF, CAD, down vs. the EUR, NZD,
New Zealand Dollar Daily Outlook: Up vs. all except the EUR
Canadian Dollar Daily Outlook: Up vs. all except the EUR, NZD
Swiss Franc Daily Outlook: Up vs. the USD, JPY, GBP, down vs. the EUR, AUD, NZD, CAD
CONCLUSIONS & Big Picture: CORRECTION STOPPED – BUT OVER? Latest EU/IMF may change everything in at least the short term because
Unlike the other plans, this one finally dealt with the immediate problem of being large enough and comprehensive enough to calm markets not just about a Greek default but also assure that ALL PIIGS were now too big to fail.
However, similar to the others, many details remain unclear, and ambiguity ultimately killed off the other plans. Biggest current questions that need answering:
- Will leaders and voters accept the burdens imposed by this rescue, especially those not in the EZ, like those of the UK and US?
- Can the economically weak PIIGS nations afford to contribute to the plan, especially the smaller ones which bear a higher per capita burden (over $1000/ household in Ireland for the prior plan that was 1/10th the size – more than Germany or any of the PIIGS nations)?
- Will the Germans accept paying their share of the bill, especially after yesterday’s regional election protests German funding and may cost Merkel her job. The current plan has largely abandoned the ‘sound-currency’ principles of the EU, something the Germans may ultimately find unacceptable. Expect rigorous, possibly violent domestic German opposition.
- Will Greece and other PIIGS nations, now freed of need for bond markets and likely to come calling for EU aid, truly enact the sustained austerity measures, now that they know they are too big to fail? Opposition in Greece, both in the Parliament and streets, is not an encouraging sign.
- THE BIGGEST QUESTION: What is the enforcement mechanism to ensure we don’t have a similar crisis later, especially now that even the smallest EZ members appear to be deemed too big to fail? Default is no longer a threat, so what is? Economic/military takeover?
Market concerns over these and other issues will determine if markets continue to rally, stall out, or resume their slide. Expect doubts and backtracking as voters and leaders realize the size of the bill they are being asked to pay with no clear guarantees of repayment.
DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.