Part 1: Prior Week Market Movers & Their Lessons For the Coming Week
The following is a weekly strategy guide for traders and investors, covering prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options. Perfect for those seeking a summary of prior week market movers & their lessons for the coming week and beyond, & a look at likely coming week market movers.
Growing Consensus That Greece Default Imminent Undermines EU, Global Markets
The belief that Greece is beyond saving grew more widespread.
- New doubts about Greece were hitting the wires already on Saturday September 3rd before the week even began: After a breakdown in talks between Greek and Troika (EU/ECB/IMF) officials over how to keep Greece on track to lower its deficits as per agreements, a senior IMF economist was quoted in the Wall Street Journal report saying he expected a hard default no later than March, possibly much sooner. That same day Reuters reported that a senior member of Merkel’s party saying that if Greece couldn’t meet its obligations it should restructure and leave the Euro-zone. These themes, along with credit markets having written off Greece altogether, were echoed throughout the week.
2. MONDAY: Greek bond yields jumped, essentially pricing in a “hard default” as austerity without devaluation is kills the economy, guaranteeing that the country will miss its fiscal targets. This raises the question, at what point, it will become politically impossible for the EU to continue providing funding to Athens that all know will not be repaid? . Greek 1 year paper +1000 bps to yield 82%, 2 years + 317 bps to 50%.
- TUESDAY: German Chancellor Angela Merkel told Christian Democrats members that Greece would not receive aid payments this month, unless it met its obligations under the bailout agreement. This comes after Merkel’s party suffered a historic loss in a regional election over the weekend
- WEDNESDAY: A Greek newspaper reports private sector participation in the Greek debt swap at 75%, well below the hoped for 90%. Greece has threatened to reject the 2nd bailout if the target isn’t reached, but a finance ministry official said it’s too early to start talking percentages.
- FRIDAY: This swap issue came back on Friday. rumours circulated that Greece could default as early as the weekend. Greece has denied this but CDS swaps showed a 90 % chance of a Greek default. A possible reason for the Friday jitters was because a bond swap was expiring Friday and there was concern that the bondholders would take the loss rather than swap into longer dated bonds. If the number of bond swaps fall short, Greece may find themselves locked out of the credit market and forced to default.
- FRIDAY: An auction of €300M in Greek T-bills gets just €155M in noncompetitive bids as banks give a clear signal about their unwillingness to offer Greece funding. Greece could run out of cash by mid-October if it does not immediately get the next tranche of financing.
- FRIDAY: Reports were out that Germany was preparing plans to backstop German banks in the event of a Greek default similar to the bank-rescue fund that recapitalized banks in 2008. The headline was out before trade in Europe closed; it led Germany’s DAX to drop to a 4% loss. The euro also sold off in response to the headline. It sank to a 1.6% loss, as of the close in New York. Remember that Deutsche Bank’s Ackermann had said earlier this week that many banks could not withstand losses on their sovereign holdings.
- Also, Finland has yet to back down from its demand for collateral. This cannot be met simply because a host of other nations will demand the same, sucking away the very cash Greece needs to survive. Unless Finland backs down, at minimum Finland may well withhold its share of bailout payments, given the strength of the anti-bailout forces (third largest party is True Finn anti-bailout party) in the Finnish parliament.
The big question here is if confidence in a solution for Greece is reaching a breaking point. If it does, why should EU leaders risk looking foolish by contributing cash to the second Greek bailout? Until now the obvious answer was to prevent defaults of the rest of the GIIPS and a global crisis. However if Greece is beyond rescue, EU leaders may decide it best to focus on protecting the EU banking system as a more direct and cheaper way to salvage what can be saved of the EU as we know it.
Other Signs Of Further EU Deterioration That Could Finish Greece
9. REPEATED SIGNS OF CONTINUED EU BANKING WEAKNESS
In addition to the above German preparations to keep its banks solvent when Greece defaults, there were additional signs of jitters about EU banks, which have always been the focus of concern throughout the EU crisis. Sovereign defaults don’t necessarily kill off the EU, but a collapse of EU banking will.
- Ulrich Schroeder, the head of KfW – a German Development Bank said many banks are hardly able to finance themselves, he believes the current situation of the banking industry is much more dramatic than 2008.
- Banks lead stocks lower in Europe, with RBS (RBS) -8% after being named in the FHFA’s lawsuit, along with Barclays (BCS -7.3%), Deutsche Bank (DB -5.5%), Societe Generale (SCGLY.PK -4.85%), and HSBC (HBC -1.2%).
10.MORE SIGNS OF GERMAN BAILOUT FATIGUE
- MONDAY: Angela Merkel’s CDU party gets its worst result ever in an election in her home state of Mecklenburg-Western Pomerania. Merkel’s handling of the EU debt crisis was a major issue, signaling fading support for bailouts.
- WEDNESDAY: German Court Grants More Parliament Say in Bailouts: In addition to items 1 & 2 above, the much anticipated German court ruling on further German bailouts ruled that the Bundestag’s Budget Committee’s oversight and approval of further German payouts would be needed, potentially slowing Germany’s ability to provide cash quickly.
- FRIDAY: Perhaps one of the biggest news items this week, and likely catalyst for Friday’s plunge, was the news that the ECB’s Jurgen Stark, Germany’s senior representative on the ECB board, was leaving the ECB because of a conflict over the bank’s sovereign bond purchase program. Per an unnamed German economist: “This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB.” After Axel Weber walked out earlier this year, despite being the clear favourite to replace Trichet later this year, Stark’s exit leaves weakens the ECB’s critical link with top EU bailout paymaster Germany.
Additional Market Movers Last Week
ECB TURNS DOVISH ON BLEAK EU OUTLOOK
THURSDAY: In his final press conference before retiring as ECB President, Trichet downgraded the EU growth outlook, and reversed EU tightening policy in place since the spring, saying inflation concern has gone from “upside risk” to “balanced,” and the growth outlook has gone from “balanced” to “downside risk,” clearly signaling that the ECB is not only finished raising rates but also considering lowering them once again.
OTHER WORRISOME SIGNS
The ECB announced it purchased €13.3B of sovereign paper through its Securities Market Program (SMP) in the week ended Sept. 2 vs. €6.7B the previous week.
Italian bond yields surged as the ECB may be backing off purchases while Berlusconi’s government weakens promised austerity measures. The Italian 10 year yields were up this week +20 bps to 5.48% and the 2 year +38 bps to 3.9%. By comparison, Spanish yields for the 10s and 2s: +7 bps and +14 bps, respectively.
Spain Local Debt Issues: A good sample of lurking trouble on the books of Spanish banks: Lender CAM reported its bad loans soaring to 19% from 8.5% previously after regulators reviewed its books. The Spanish central bank has begun seeking a buyer for the troubled savings bank.
More proof of a slowdown in Germany: factory orders in July falling at 2.8% rate, much faster than the 1.5% drop expected. This compares with 1.8% growth in June.
US: Bernanke, Obama Provide No Relief For Markets
On Thursday, neither Bernanke nor Obama produced convincing evidence of hope for markets from US policies. In particular :
Stocks dropped after Bernanke provided no new insight into what the fed might do to heal the US economy.
US President Obama announced the much anticipated big jobs package, and initially markets moved higher on it. Not only was it bigger than some had expected, but the GOP didn’t line up to kill it right away, as some presumed they would. However it was overwhelmed by bad the Stark resignation news Friday as EU panic remains the big market driver.
Fitch Threatens Japan, China Credit Downgrade
Friday: Fitch stated that there is potential for both China and Japan to be hit with a debt rating downgrade.
Ongoing Global Slowdown, Central Banks Cease Tightening, May Loosen
Incoming data continues to suggest slowing growth. In response, the week brought a batch of evidence that central banks formerly on a path of raising rates are now becoming more dovish.
In addition to the Fed, BoE,and BoJ holding rates low and possibly becoming more dovish, the past week saw other banks back away from further increases, some even hinting at reversing course and lowering rates.
ECB: As noted above, and this was the most prominent, market moving central bank shift.
SNB: Its shocking move towards unlimited CHF printing to keep the EURCHF steady was in some ways more dramatic, certainly more radical a move, than that of the ECB. However the EUR remains a much more important currency than the CHF.
China: The PBOC has not raised rates further despite rising inflation, and there have beenreports that slowing Chinese growth is causing the PBOC to shift its priorities back from inflation fighting to growth.
Other central banks moving in a more dovish direction include the those of Australia, Canada,Sweden, Indonesia, the Philippines, South Korea, and Malaysia.
Tuesday SNB Intervention
The Swiss National Banks (SNB) intervention to prevent the EURCHF from slipping below 1.20 was, along with the general slide in the EUR, the big news in forex markets. It’s believed this will keep the CHF down for the coming months but beyond that the success of the move to keep the CHF low and protect Swiss exports will depend on how scared markets remain. If fear remains high, funds may yet flow back into the CHF as, to paraphrase Kathy Lien, markets become more concerned with a return OF capital rather than ON capital.
Lessons & Ramifications
GOLD, THE JPY, AND USD & US TREASURY BONDS RISING
Essentially it was a risk-off week that favoured safe haven assets and currencies, as well as the most popular EUR (and USD) hedge, gold.
EUR SMASHED IN PERFECT STORM
- The market drivers noted above were all bad for risk appetite in general and most of these centered around the EU and Euro, thus no surprise the EUR has fallen ~19% from 1.4500 to 1.3655, 845 pips.
- Concerns About, Greece And Other GIIPS Defaults, EU Troubles
- Trichet Comments Thursday: Rate hikes over for now, downgraded growth outlook suggest steady or lower rates ahead.
STOCKS SELL OFF ESPECIALLY IN EUROPE
EU stock indexes experienced not one but two “mini-crashes on both Monday and Friday
- MONDAY: Europe closes the books on a near-crash of a day. Stoxx 50 -4.9%, Germany -5.3%, France -4.5%, Italy -4.5%, Spain -4.8%, U.K. -3.5%. Euro -0.8% vs. the dollar at $1.4097. The German 10 year Bund yield dives 14 bps to 1.86% as Italy’s 10 year paper skies 28 bps to 5.57%. Behind the move were assorted EU fears noted above, ongoing reaction to the poor US jobs figures, and doubts that either Bernanke or Obama would provide new hope from the US in their talks later in the week.
- FRIDAY: Stoxx 50 -4.3%, Germany -4.2%, Italy -4.6%, Spain -4.3%, France -3.7%, U.K. -2.3%. For the week, Stoxx 50 -7%. Switzerland – benefiting from the franc’s devaluation – +1.3% for the week. The catalyst for Friday’s dive appeared to be the resignation of Jurgen Stark from the ECB, suggesting deeper troubles and divisions at the ECB.
IS GREEK DEFAULT COMING?
For the 10 reasons cited above, Europe appears to be within days of some sort of breakdown or yet another near term fix, mostly due to huge concerns that Greece might not get its bailout and thus default by October, likely dragging down the rest of the PIIGS (which will be cut off from debt markets) and EU banking system that carries such a large portion of their assets in these dubious bonds.
Recent history suggests another near term patch that buys some time but fixes nothing, leaving the door open for another crisis in a matter of months.
WHAT TO DO?
At this point, with Greece, and thus the other GIIPS, EU, and global markets all teetering, what happens next is in the hands of policy makers, and thus inherently unpredictable. Our overall bias remains bearish in the coming weeks, meaning we sell into rallies, and buy assorted safe havens on dips.
The one really obvious trade remains buying gold on dips to around its 20 day EMA. While gold is not a safe haven but rather currency hedge (same thing in this environment of a weakening EUR and USD) all the fundamental forces fueling its rise remain fully intact if not stronger. While gold has stayed in a trading range for the past weeks, we view this as a normal consolidation/resting after a huge burst higher since August fuelled by debt issues and implied coming stimulus and low rates in both the US and EU.
Further trouble in the EU (from Greece and other GIIPS) and US (more debt/budget struggles, and more QE) in the coming months suggest odds favour gold either holding steady or making a run above $2000/ oz.
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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