PRIOR WEEK MARKET MOVERS: IS THE FEAR PRICED IN?

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.

 

 

G-d only knows, G-d makes His Plan

The information’s unavailable to the mortal man,

We’re working our jobs, collect our pay,

Believe we’re gliding down the highway, when in fact we’re slip sliding away

 

– Paul Simon

The short answer to the question posed in the title:  for the past 8 weeks, yes, though few believe we’ve seen the worst of the current move lower, and there’s new evidence of much worse to come.

Two weeks ago markets rallied on faith and hope, last week they dropped on fear and dread, this week they did both and ended largely unchanged. Markets rallied early in the week on belief in a coming big plan to save the EU, gave up the gains later in the week as those hopes were dashed, and closed little changed.

 

The same fundamental market drivers of the past weeks remain in place, and the technical decline becomes more firmly established

 

 

The Technical Picture
 

As exemplified by the S&P 500, risk asset markets finished their 8th out of 12 weeks down, but remain locked in the 1200 – 1100 range of the past 8 weeks that began at the end of July. The technical significance of this otherwise harmless sideways movement is that the big wound inflicted that week is not healing, and the downtrend is thus becoming more entrenched as the 10-50 week moving averages continue diving towards the 200 week MA, and the index remains firmly within the Double Bollinger Band sell zone, indicating further downside ahead.

 

 

The Fundamental Picture
 

Here’s what was behind the technical deterioration this week:

 

 

EU CRISIS DOMINATES: IT’S ALL POLITICAL
 

rumours and hopes they fed regarding a big EU rescue plan overrode any data. In other words, markets are moving with sentiment about likely political rather than economic events.

 

No one expects a “bazooka” style big bailout plan needed to calm markets until markets hit a crisis dire enough to scare Germans into approving the ~2 trln EUR believed needed to convince markets that even Spain and Italy are not at risk of default.

 

Until then, EU leaders, especially those of Germany & France, are likely to continue to opt for the politically easiest route of minimal measures that cost the least up front but only provide temporary solutions and just defer the hard choices between

 

Taking The Pain Of Greater Costs To Preserve the EU and Euro In Its Current State
 

Funding countries accept a huge additional burden of subsidizing the debtors via some kind of The big bailout fund of ~ 2 trln EUR. So far there are no credible plans that we know of, as they involve assorted forms of shared liability for EZ members’ debts that carry obscene risks. Seehere, and here.

 

Debtor nations accept further austerity and reforms needed to live within their means and/or become more competitive.

 

As the above implies, everybody accepts reduced living standards.

 

Everyone accepts reduced national sovereignty in favour of more centralized, enforceable EU budgeting to ensure against a repeat crisis.

 

Dissolution Of The EU As We Know It
 

The above may well be asking too much. The costs of dissolution are said to be even higher than going the distance, however:

 

No one really knows what that would be. Estimated haircuts for Greek bondholders were originally believed to be around 21%. Now (surprise! Not) from FT.com (here)  and the Italian daily Linkiesta (here) that much higher private sector “involvement” closer to 75% is demanded before Germany and other funding nations agree to further bailouts.

 

Dissolution, while still a sensitive topic (who likes to admit to a 12 year multi-trillion dollar mistake?), has significant advantages

 

  • Implies an ultimate end to the crisis

 

  • Is conceptually a far simpler thing to sell to voters:

 

  • Budgets and currencies can be custom fit for each nation’s needs. Avoids the scary loss of national sovereignty and potential for political conflicts that comes from: Northerners dictating budgets to Southerners Northerner tax payers feeling forced to subsidise the South.  A large majority of German voters have had it with bailouts (see here and here). Do we really want to risk another generation of pissed off German voters who feel they’ve been screwed and want to retake prosperity stolen via “international conspiracies?” Am I the only one feels nervous about this?
  • Budgets and currencies can be custom fit for each nation’s needs.
  • Avoids the scary loss of national sovereignty and potential for political conflicts that comes from: Northerners dictating budgets to Southerners
  • Northerner tax payers feeling forced to subsidise the South.  A large majority of German voters have had it with bailouts (see here and here). Do we really want to risk another generation of pissed off German voters who feel they’ve been screwed and want to retake prosperity stolen via “international conspiracies?” Am I the only one feels nervous about this?

 

 

Based on the past years’ experience, we should never underestimate the willingness to do the politically easier thing.

 

Our take: The threat of global collapse might scare them enough to muster the political will, but we really doubt they’re ready to take the big leap towards the US of Europe, unless we accept that EU leaders can continue to act contrary to the will of their voters.

 

The consensus is that this all ends in a split Euro-zone and 2 forms of Euro: one for the North, one for the South. The plans and transitions will be very difficult and thus are not expected soon. So the EU will continue to pressure risk assets in the coming weeks, with possible rallies on hopes of progress towards a solution. These are likely to be disappointed.

 

 

There were a number of great articles out this week on the obstacles confronting the EU as we know it. For some of the best, most influential articles of the past week not already cited, seeherehere and here.

 

 

GLOBAL SLOWDOWN
 

Even if the EU crisis were resolved tomorrow, the data pointing towards a global slowdown continues to roll in from every major economy. Highlights of the past week included:

 

Assorted bad news about China
 

  • A continued sharp drops in Chinese stocks and ADRs (their US- listed counterparts).
  • China’s HSBC Manufacturing PMI for September remained below 50, the dividing line between contraction and expansion for the third straight month.
  • Rising Chinese sovereign CDS rates, a sign of rising concern about China’s creditworthiness (see here for more)

 

…And The US
 

  • The Economic Cycle Research Institute (ECRI) now predicts a new US recession is unavoidable. In case you’re not familiar with ECRI, its predictions carry exceptional credibility. As Aaron Task notes (here):

 

“…you may be wondering what separates ECRI’s recession call from the myriad other recession calls out there. First, ECRI’s primary raison d’etre is predicting recession and recovery calls. Second, and more importantly, The Economist reports ECRI has never issued a “false alarm” on a recession call, meaning many of the Chicken Littles currently declaring “the sky is falling” might actually be right this time around.”

 

 

 

… And The World
 

Highlights include:

 

  • In addition to the threats posed by an EU collapse, The Economist reported (here) that the ongoing austerity drives worldwide and US political deadlock further weigh on markets.

 

  • Zerohedge.com presented (here) 9 charts from Reuters summarizing why the world economy is slowing yet again, and also reported of a wave of hedge fund redemptions by sophisticated investors (here).

 

Lessons & Ramifications
 

Our position remains unchanged from the prior week. Week to week, markets are moving with news on the EU. Longer term, there’s nothing to suggest we’ve bottomed. What would change our thesis? With no strong reason to believe economic fundamentals noted above would improve, there is always the chance of an EU plan, new stimulus, or some other official intervention that gives markets at least a temporary pop higher.

 

 

 

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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