Overall, most risk assets lacked a clear trend, yet there’s too much risk this week to trust the recent trading range. So now what?
PRIOR WEEK: Greece, Bernanke, Slowing Growth
Some volatility, but in the end, stocks were overall flat to lower, the USD and other safe haven assets were up, gold and oil fell. Here are the prime market drivers last week and their likely lessons for the coming week.
The major stock indexes advanced Monday and Tuesday in correct anticipation that the current Greek government would survive a no confidence vote and thus keep hopes alive that the austerity measures required by the Troika (EU/IMF/ECB) for Greece to get its next tranche of cash needed to avoid default next month. That alone was good enough for risk asset markets to ignore very bad results on German and EU ZEW Sentiment, as well as US existing home sales
Late Thursday there were reports that Greece reached an agreement with the EU and IMF on a new five-year austerity plan. The news came in time to boost US markets. However most commentators noticed that this was no big surprise, and that the real question was whether the Greek parliament would ratify this plan. That won’t be answered until Wednesday June 29th. We suspect that the minor rally Thursday was as much due to the technical support of the nearby 200 day moving average on the S&P 500 and other major indexes. The news also helped Asian risk asset markets close higher Friday.
However news later that same Friday that the majority for the Greek austerity vote may have shrunk to just 3 votes, along with fears of Italian bank credit downgrades due to their exposure to a Greek default, sent European and US markets sharply lower Friday, wiping out the week’s gains for European and US risk asset markets.
Markets had been quiet Wednesday, but rolled over after bearish comments by Fed Chairman Bernanke about reduced US growth prospects in 2011-12 and lack of any plans for QE 3. Perhaps equally unsettling was his admission that the Fed is not clear on why growth remains so slow. This news, along with poor weekly US jobs data, pressured European risk asset markets lower Wednesday and both Asian and European markets Thursday.
Building Consensus of Global Economic Slowdown
The above occurred in the context of continued indications of slowing growth throughout the major economies while emerging market nations like India continue to raise interest rates in order to slow their own growth.
- German & EU ZEW Economic Sentiment both missed consensus estimates by a wide margin, as did German, French, EU, and Chinese PMIs
- US first time unemployment claims, and durable goods both missed forecasts also, though not by as wide margins as the above data out of Europe.
Oil Falls On Short Term Market Intervention By Governments
On Wednesday the IEA reported that the US and other nations were releasing strategic oil stockpiles to lower oil prices. Asian nations did the same the next day, showing a coordinated effort to knock down oil prices that have weighed on growth. Why do this now? The move may have been meant as a warning shot to OPEC after its failure in prior weeks to agree on increasing supply.
COMING WEEK MARKET DRIVERS: Neither A Reliable Trend Nor Trading Range
Events related to the ongoing Greek default threat remain the likely big market mover.
Austerity Plan Debate, Riots, Vote June 27-30
The Greek parliament is scheduled to debate and vote on whether to approve the EUR28 billion austerity program. Theoretically, this is next big challenge for Greece and the EU to avoid a Greek default and the very likely financial crisis that would follow.
As we’ve been arguing for weeks, it’s in fact probably irrelevant. Given that the risks of utter global financial collapse are quite real, in the end, no matter what Greece votes, it will get the needed cash until governments can get plans and funding lined up to keep confidence in global banking stable and prevent a said global financial crisis. For details on the contagion risks and ramifications for both markets and investors, see A BRIEF, UPDATED GUIDE TO GREEK CONTAGION RISK, INVESTOR RAMIFICATIONS.
While Parliamentarians debate, tens of thousands are likely to be loudly, possibly violently demonstrating against austerity. It’s unclear what kind of impact the two days of general strikes and protests may have, but they’re unlikely to inspire confidence in Greece’s ability to endure years of austerity demanded by the EU.
July 3rd EU Finance Ministers’ Meeting – Dramatic If Greek Parliament Rejects Austerity
Based upon the statement released after the 7 hour Euro-zone Finance Ministers meeting from June 23-4th, European officials have effectively given Greece until July 3rd to approve demanded austerity steps, as European officials will be holding a meeting that day to decide whether Greece will receive their next tranche of aid and any additional support.
The pro-austerity/bailout majority has fallen in the past week from 5 to possibly 3 votes. Such a narrow majority will tempt Greek MPs seeking added favours. Get enough of those and the vote may well fail. If Greece calls the EU’s bluff and votes no, the EU will then decide whether to retain its credibility or let Greece default at the risk of sparking a global financial crisis.
Most likely however, the contagion risk from a Greek default at this time makes EU credibility an unaffordable luxury for now, so somehow Greece gets the cash until governments are ready for a Greek default. That means they have the regulatory and funding plans needed to bailout banks and maintain confidence in them. See A BRIEF, UPDATED GUIDE TO GREEK CONTAGION RISK, INVESTOR RAMIFICATIONS.
That readiness could be a matter of weeks or months, assuming the relevant governments are still in power and have not been tossed by voters fed up with the pain of austerity and bailouts.
Anticipation of German Constitutional Court Ruling July 5th
The German Constitutional Court will have a formal hearing to decide whether the Greek aid package of May 2010 violated the ‘non-bailout’ clause of the German and European Constitution. It will rule whether the first Greek package of May 2010 was in accordance with the German and European Constitution. The German government must prove that its actions did not violate the ‘non-bailout’ clause. Specifically, it will have to argue that sovereign financial transfers will act only as ‘bridge funding.’ Even if successful, this court victory could be as damaging as a defeat, for it would imply that the private sector will take a bigger burden when it comes to a final restructuring peripheral debt.
Thus a ruling in favour of German bailout participation could ironically also spark a contagion risk, as EUR debt investors could take that ruling as an official sign of haircuts on the way.
US Default Risk Still Low But Rising
While the breakdown in negotiations over the US debt ceiling can be shrugged off as ongoing normal brinksmanship given that the US has until August 2nd to resolve this issue, but the impending deadline and rising uncertainty that the ceiling will be raised on time to avoid default due to sheer ‘deficit attention disorder’ could become more of a market focus at any time once the Greek default threat recedes into the background for another month or more.
Economic Calendar Events
Next week’s calendar is very light on top tier market moving events. Due to the US July 4thholiday, the usual first Friday of the month jobs reports will be deferred until July 8th. Key events include:
UK current account, final GDP, inflation report
US: S&P/Case Shiller composite 20 housing price index y/y, CB consumer confidence.
US pending home sales
EU ECB President Trichet Speaks
US weekly jobless claims, Chicago PMI
Japan: Tankan Mfg Index
China: Mfg PMI, HSBC final Mfg PMI
UK: Mfg PMI
US ISM Mfg PMI
NB: The coming long July 4th weekend in the US and bank holiday Monday suggests light trading Friday and Monday once we get beyond midday GMT, as any price moves may not have the follow through from US markets. In sum, after the Asian close, there’s a good chance of quiet range bound trade to close out the week, barring any major surprises or EU crisis events.
TECHINCAL FACTORS & LESSONS THE CHARTS HOLD FOR NEXT WEEK
What does the bellwether S&P 500 index daily chart below tell us?
S&P 500 DAILY CHART COURTESY OF ANYOPTION.COM 01JUN26 0537
The main lesson is that we have an ongoing eroding technical picture for risk assets. Specifically:
On daily chart we have once again closed the week within the Double Bollinger Band Sell Zone, the area bounded by the lower 1 and 2 standard deviation Bollinger Bands (the lower green and orange bands. This suggest we now again have re-established strong downward momentum that suggests more to come. For full details on interpreting double Bollinger bands see: 4 RULES FOR USING THE MOST USEFUL TECHNICAL INDICATOR, DOUBLE BOLLINGER BANDS
- Just as bad, after cracking above the 200 day EMA at the start of the week June 20th, Friday brought the index back below it. It is a very bearish sign when the index is below its 200 day moving average
- The 10 day EMA about to cross below 200 day EMA, confirms ST momentum failing, confirming the slowdown the 10 day EMA first showed when 10 day EMA crossed below both the 20 and 50 day EMAs back in Mid May
- If you zoom back to the weekly chart below, we see the index has now given up its gains for 2011 since April at around 1260, and further downside opens the door for tests of the 1240 range, at which there is support of the 61.8 Fibonacci retracement level and the 50 week EMA.
S&P 500 WEEKLY CHART COURTESY ANYOPTION.COM 03jun 26 0557
The technical picture does, however, leave room for optimism.
If we look at the price movements of the index in the last few weeks (bounded by the white lines) as shown below, we see that the index has stayed in a tight trading range despite all the bad news, and that it can be argued that the 200 day EMA has in fact held up, albeit with some penetrations, but these have proven temporary.
S&P 500 INDEX DAILY CHART JULY 12-24, COURTESY OF ANYOPTION.COM
Finally, with the index essentially flat for 2 weeks, it still has not even fallen 10% from its Late April highs, and that shows real resilience given that we’re in the midst of another Greek debt crisis, the end of QE2, and a likely slowing of global growth.
Ramifications: So What Do You Do?
Honestly? Nothing. As noted above, this week is likely to see Greece saved from default for the near term. In the past, that has meant a relief bounce for risk assets.
However there are enough risks that this may not happen.
Given that the gain from a relief bounce is unlikely to be large, while the pullback in risk assets could be severe if there’s a failed austerity vote, botched last minute rescue , or simple failure to convince markets that a Greek default risk has been pushed off for a significant period.
In sum, not enough reason to be bullish or bearish, so we stand aside. There’s no near term trend, yet there are enough risk events that could send risk assets moving higher or lower beyond the recent weeks’ trading range.
Even oil and gold’s near term moves seem more like short term moves that could well be played out.
Thus we have neither a reliable trend, nor a reliable trading range. Hey, summer’s here, perhaps the markets are telling us to take a break?
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?
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