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.

  • Summary of overall technical and fundamental picture for risk assets
  • Speculation about more stimulus from Jackson’s Hole dominated markets
  • “Less bad” data had some influence too
  • Meanwhile, except for bond and precious metals traders, markets largely ignored a wave of scary developments as the EU continues to slide towards the edge of the abyss
  • How to protect your assets and prosper

Technical Picture For Risk Assets
As the below S&P 500 weekly chart shows, risk appetite made its biggest advance since late June, and nearly recovered most of last week’s losses.

ScreenHunter 07 Aug 27 23 56 Prior Week Market Movers: Jackson Hole Distracts While EU Collapsing


However  the technical evidence for risk assets overall remains firmly bearish:

  • The loss of the 1200 level that had served as support since November 2010 remains and for the foreseeable future this level will remain significant resistance, reinforced by both the weekly 100 and 200 day EMA. So until this level is breached, we see no prospects for a sustained rally
  • The index remains deep within the area bounded by the lower 1 (green) and 2 (orange) Double Bollinger Bands,  (the Double Bollinger Band Sell Zone see  4 RULES FOR USING THE MOST USEFUL TECHNICAL INDICATOR, DOUBLE BOLLINGER BAND for details)  indicating that downward momentum remains strong.
  • This picture of strong downward momentum gets further confirmation from the ongoing crossing of shorter term EMAs beneath longer term EMAs. For example, the 10 week EMA (blue) has crossed below the 20 week EMA (yellow) and both are threatening to cross beneath the 50 week EMA (red) in the coming weeks barring a significant rally.

To better understand the daily movements of the prior week, we look at the below daily S&P 500 chart which shows risk appetite steadily on the rise most of the week.

ScreenHunter 05 Aug 27 23 21 Prior Week Market Movers: Jackson Hole Distracts While EU Collapsing


Underlying Fundamental Market Drivers Last Week
What was behind that?

The short version: Markets moved mostly with belief about whether Bernanke would offer more stimulus (good for stocks & other risk assets, bad for the USD because stimulus is seen as a form of devaluating money printing). After that, data out of China and the EU helped, as did a technical bounce off near term support for risk assets.

Surprisingly, a string of very disturbing developments in the EU (still THE threat to global markets) had no discernable influence on risk assets, though credit markets clearly were getting more anxious. More on these below.

Optimism that Bernanke would indeed offer some new stimulus that would once again boost asset prices as it did a year ago.

Given that risk assets were still close to near term technical support areas, data out of China and the EU was not great but was of the “not as bad as expected” variety, which can be good enough near support areas when markets want to bounce. That drive to bounce led markets to ignore plenty of bad data( like German ZEW, US new home sales, & CAD core retail all down, Moody’s downgrade of Japan’s credit rating from Aa2 to Aa3 on further government debt buildup), and a stream of very worrisome developments in the EU. More on these developments below.

Fading optimism that Bernanke would offer hope for new stimulus on Friday. Some attributed this to an article by’s Steve Liesman (known to have excellent Fed contacts) that asserted no new action was coming.

Falling European markets, unsettled by a mini-flash crash in Germany that may have started on false rumours of ratings downgrades, an extension of short selling bans,  Greece activating emergency liquidity measures, and the BoE opening a line of swaps to the ECB. Most disturbing was an interview  in The Telegraph with German President Christian Wulff that cast further doubt on whether Germany would or even could continue to serve as primary bailout paymaster. Few believe the EU and Euro will survive in their present state without continued German support. More on that below

A worse than expected reading of US first time weekly jobless claims didn’t help, serving as a reminder of US economic weakness.

After a week of markets moving mostly with sentiment about what Bernanke would say, markets continued that pattern Friday. The actual speech didn’t promise any new stimulus, and noted that the Fed’s tools to stimulate long term growth were limited, and that more was needed from Washington and that prompted a selloff. However, Bernanke left the door open for stimulus by announcing that the September Fed policy meeting had been expanded from one to two days, within an hour of his speech markets reversed to close higher, as markets saw hope that stimulus would then be announced. An article that morning in the Wall Street Journal  by Jon Hilsenrath, considered by some to be Bernanke’s chosen mouthpiece for telegraphing hints of his true intentions, suggested the September 21st Fed meeting would indeed bring new stimulus.

Both stocks and gold moved higher, reflecting the belief that more stimulus is on its way. Gold closed the week back over $1800/oz, recouping about half of its losses, and reflecting its continued strength as both the EUR and USD risk being battered by new money printing as the ECB and Fed prop up their struggling economies.

Worrisome EU Developments Ignored By Stocks, Other Risk Assets
While stocks and forex may have ignored these developments, ongoing fear was well reflected in EU sovereign and bank bond yields and EU banking stock prices (at least when trading or shorting wasn’t suspended). There was plenty to be worried about. Highlights include.

Making a move they’ll regret, Greece agreed to provide cash collateral in exchange for Finnish bailout loan contributions, now other nations are clamoring for the same in order to avoid looking like suckers compared to the Finns. Among these are, uh-oh, some German officials, including labour minister Ursula von der Leyen joined in, calling for EU countries receiving bailouts to put up their “gold or industrial holdings” as collateral. Her views carry some weight because she is part of a CDU commission set-up to recommend on Germany’s response to the debt crisis, and is considered one of the leading candidates to succeed Merkel. Obviously Greece cannot provide collateral to all who ask, as it would simply mean that large chunks of the loans just have to be given back as collateral. Moody’s correctly pointed out that this agreement threatens to scuttlethe entire bailout as the pursuit of similar agreements by other nations could delay the next trance of financial support and cause a Greek default.

Meanwhile, Greece insisted that the current ~60%  private sector participation rate in the bond restructure deal of the latest rescue package now increase to 90%, which is not considered a realistic demand. Perhaps Greece is just creating negotiation concessions to offer in place of collateral that it cannot provide?

On Thursday a Greek paper reported that the Bank of Greece had activated an emergency liquidity assistance (ELA) facility to enable banks access to funds in the event of a sovereign default.

For the EU and Euro to survive in their current form, either:

  1. The prosperous (?) core nations agree to some kind of Eurobond financing that allows peripheral nations to access cheaper credit
  1. There’s a huge restructure (aka partial default) on GIIPS debt in order to reduce this debt to levels these nations could realistically repay, with some mechanism to support the banks holding these bonds that would be stuck with massive losses .

On Wednesday the chances for the first option appeared to shrink drastically with an extremely disturbing article appeared in the UK newspaper The Telegraph. Highlights include:

German President Christian Wulff has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds. In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.

” ‘I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,’ he said. ‘This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,’ he said, speaking at a forum of half the world’s Nobel economists on Lake Constance to review the errors of the profession over recent years.

“Mr Wulff said the ECB had gone ‘way beyond the bounds of their mandate’ by purchasing €110bn (£96.6bn) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation.'”

Mr. Wulff said Germany’s public debt has reached 83pc of GDP and asked who will ‘rescue the rescuers?’ as the dominoes keep falling. ‘We Germans mustn’t allow an inflated sense of the strength of the rescuers to take hold,’ he said.

” ‘Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult,’ he said.”

“The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECB’s bond purchases and also warned that the EU’s broader bail-out machinery violates EU treaties and lacks ‘democratic legitimacy’. The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7.”

Marc Ostwald from Monument Securities said Germany is drifting towards a major constitutional crisis. ‘This has all the makings of the revolt that unseated Helmut Schmidt [in 1982], and indeed has political echoes of the inefficacy of the Weimar regime,’ he said.

Thus little over a month since the July 21 Greek rescue package, and with about a month before the plan is to be ratified by various EU parliaments,  the agreement of Greece, Germany, and any other collateral seeking nations is no longer assured. Is all this mere negotiating brinksmanship? To a degree, certainly, but it’s creating precisely the kind of uncertainty that makes further market declines and a genuine crisis so much more likely.

Not surprisingly, bond markets are, ahem, concerned. While stock markets may have ignored these developments, bond markets have not, and it’s the bond markets that could ultimately drive the EU into the grave.

Cullen Roche (via CDS spreads on debt for 6 of Europe’s largest banks – SocGen, Unicredit, Barclays (BCS), Credit Agricole, Banco Santander (STD), and BNP Paribas – are now above 2008 levels. While investors in American banks might not be showing as much panic as they did 3 years ago, it’s a whole different story for Euro names. Note the below chart via Cullen Roche:

ScreenHunter 08 Aug 28 01 57 Prior Week Market Movers: Jackson Hole Distracts While EU Collapsing

08 aug 28 0157

Meanwhile, Greek bond yields continued higher, having long a ago ceded any gains from the July 21 agreement. The 2 year note yield jumped nearly 240 basis points to a new record of 42%. The 10 year, 55 bps to 17.97%. ECB bidding for other PIIGS’ bonds kept their rates from radical spikes over the past weeks.

Direct ECB lending to GIIPS nations continued to rise, a sign that these nations are unable to access credit markets. For example:

ScreenHunter 09 Aug 28 02 09 Prior Week Market Movers: Jackson Hole Distracts While EU Collapsing

(via John Mauldin’ Thoughts from the Frontline (09aug 28 0209)

On Wednesday Reuters revealed a Fitch report that market jitters over the sovereign deficits had pushed global CDS liquidity to the highest level on record. Developed market CDS instruments – not emerging markets –  led the surge, indicating, “renewed market uncertainty on the potential for euro-zone contagion” and a global slowdown per Fitch.

More Signs Of Credit Trouble For Core EU Banks & Sovereigns
Here’s more that all but the bond markets amazingly managed to ignore.

As noted here, two important articles this past Monday highlighted the increasing difficulty of both EU core sovereigns and banks.

  • Morgan Stanley has reported (via Zero Hedge) that there is essentially no long term debt market for EU financials, not just for GIIPS or French banks, but even for German banks!
  • FTAlphaville commented on a Fitch report that US money market funds are draining cash from EU banks, again, including even German banks

Per a Reuters report A London-based hedge fund, Cairn Capital, believes France’s AAA credit rating is likely to be downgraded and Germany could easily follow as the costs of bailing out weaker EZ economies push up their own debt loads.

Lessons & Ramifications For The Coming Week
Bias remains firmly bearish in the coming weeks though there is a chance that  anticipation of new stimulus might provide some support, though no one at this time believes it will have the impact of QE2 on asset prices.

  • Fundamentals remain very bearish. In addition to the above troubles, additional reports of downward global growth revisions continue to roll in. George Soros was quoted in Der Spiegelthat there is little doubt the US will hit a double-dip recession
  • Technically speaking, charts showed some steadying but no real move higher.

How To Survive & Prosper

  1. Equities: New positions should be short only. We believe it is too early to establish new longs in equities and other risk assets, though there is nothing wrong with entering some buy orders to open partial positions around 2009 lows, which would be a mid-term likely support point, from which you could evaluate things further. Bias to dividend payers in currencies other than the USD and EUR, though beware financials at this time.
  2. Precious Metals: Long term  fundamentals unchanged, support further moves higher, technically trends remain very strong though vulnerable to short term pullbacks. Consider adding to long  positions on gold or silver on dips to support around the 20-34 day EMA for both metals.
  3. Other Commodities: those tied to growth like copper will suffer in the medium term, as may others. Though longer term supply demand picture remains very positive for energy and agricultural commodities, especially grains.
  4. Forex: Bias remains to downside. EURUSD at upper range, and fundamentals are bad for both, though worse for the EUR given the EU crisis and overall risk off environment. Safer to play these via gold or silver, which benefits from weakness in either or both.

For more on next week’s likely market movers proceed to part 2 of this report at under the weekly tab.