View: Bears should have much better levels to play from, 1.63% the key level for Bunds
Quite how far this risk on move can go is hard to say, much of the detail of the Draghi plan was leaked ahead of time but still there was a rush of new money into risk assets once the OMT was formally unveiled and this morning’s German constitutional court decision was equally unsurprising in its outcome, even the oversight the Court requested with regard to the level of German contributions to the ESM.
Full report below…
View: EUR/USD to resume mid-term downtrend, add to shorts on any s/t blip higher
Thanks to some encouraging words from Draghi in early August the EUR found decent traction in financial markets, rallying nearly 1.9% in trade weighted terms over the past month. And as ever the improvement has led to a flurry of more bullish EUR calls from analysts, anticipating decisive action from Eurocrats, specifically the ECB where at tomorrow’s meeting the consensus seems to be there will be clarity on the touted bond purchase programme, which would naturally be good for the single currency. Furthermore the market has had the prospect of more QE from the Fed to lean on which in the past has been generally good for that other currency heavyweight (using the term very loosely), reinforcing all this intellectual front running.
Full report below…
View: Draghi’s comments should draw EUR/USD back to selling levels, m/t trend bearish
Reading some amusing comments reacting to Draghi yesterday, the best so far being ‘there won’t be a Euro short left once the ECB has finished’ (to paraphrase) which we’ll have to put down to heatstroke. Fundamentally the best adjustment mechanism to help peripheral realignment is a weaker currency. The other ideas such as the confidence the economies will receive from effective fiscal consolidation and the structural reforms that sit alongside this prescription sound nice but are rather ineffective in the shorter-term and overlook the recessionary pressures that are resulting from them, most evident in the Greek death spiral. ECB medicine is likely to be equally ineffective as we know that the central bank itself is one of the key proponents of the austerity model and German opposition to bond buying will continue to obstruct. We don’t think another LTRO would be a game changer or for that matter another rate cut, already justified by the inflation outlook. Perhaps the aim is just to buy time over the summer. Furthermore the kind of firepower needed to really rebuild confidence will continue to lag what is needed, evident in the sums the EFSF has and ESM has to work with.
Full report below…
View: EUR/USD1.1877 the key draw, discipline is to keep selling rallies
Euro price action has been a little flat over the past few days, failing to find momentum following the breach of the 1.2288 support level last week which marked the low point of early June. This has been despite generally negative news flow out of the region too, specifically the issues surrounding the Spanish bank bailout which is covered off rather well here (http://bit.ly/Ngd8Zq) and new round of self-defeating austerity announced by PM Rajoy this morning. This looks a little unusual in our eyes given that these developments create more questions than answers in terms of the banking bailout and further budget cuts/tax increase are likely to only deepen the Spanish recession and we know where that spiral goes. Furthermore there remain doubts about the ESM, currently caught up in the German Constitutional Court among other places, and the ECB’s tone continues to be standoffish, suggesting the crisis will continue to run with obviously negative implications for the EUR.
Full report below…
View: Banking/Fiscal union something for a smaller Eurozone, we dislike French debt
Global markets response to the Spanish bank bailout is interesting, it appears that investors have become a little more confident they can compartmentalise the situation while at the same time seeing the package as insufficient, which is most clearly visible in the diverging paths of equity markets and Spanish bonds. The poor performance of this market is clearly understandable given the structure of the package will be detrimental to existing SPGB holders, effectively creating a €100bn tier of debt that sits above them on the creditors list (assuming it is channelled through the ESM), something we know from Greece is never good. Furthermore the actual sums involved look unlikely to be sufficient, even the Spanish government acknowledges that there are still significant downside risks in the property market. New guestimates from JP Morgan have suggested the sector might need €350bn in total, ouch. It doesn’t look particularly good for some of the other creditors, Italy for example will have to fund its contribution in the markets at 6% while lending to Spain at 3%.
Full report below…
View: DAX bounce should be used to rotate to US equities
You have to admit the equity bulls have control when a batch of very dire European PMI releases are shrugged off when a modestly higher US equivalent turns up later in the afternoon as was the case on Monday. It is perhaps more surprising given that this was the manufacturing survey, when we all know that in the US services make up 70% of the economy and the (currently rather cold) boiler room of the European economy is those hyper-efficient German manufacturers. Of course the market had already had a heads up following the flash European numbers but it’s hardly as if US consumption is going to come to the rescue of Europe, in fact there has been debate on how weak European demand is dragging on growth in Asia.
Full report attached:
View: Tighten stops on DAX longs, start looking for a trigger to sell EUR/USD
Approving the Greek bailout failed to create that watershed moment that we had earlier hoped for, political bickering seeing to that. In the end, the whole process proved another example of how deep the divisions in the Eurozone are, to the point that opposing sides are happy to elevate what are effectively irrelevant points to the level of deal breaker. Indeed, it seems ridiculous to place so much weight on what Greece’s debt/GDP ratio might be in 2020 when the measures forced upon the country to get there will simply reinforce the downward spiral the economy is already in, ensuring the target is missed. The fact the Troika think 120% debt/GDP level is sustainable following what would amount to a decade of austerity is even further outside the box of rational thinking.
Full report below…
View: Greek bailout creates upside, Greek chaos creates downside. Easy bet.
Greek problems continue to unsettle markets, evidenced again on Monday. Of course, investors are right to be nervous, simply because the consequences of failure are so great. It’s not just the debt restructuring talks either with the Greek government under pressure to implement further budget cuts in order to qualify for the next disbursement from the €130bn bailout fund. Failure of either discussion could trigger that much-feared default when that €14.5bn redemption hits on March 20th. The fact that officials from both sides keep setting close deadlines that in turn are missed and PM Papademos’ request the Finance Ministry produce a report on the implications of a default and Eurozone exit are not particularly helpful either.
Full article below….
- Revisiting The Greek “Razor’s Edge” (zerohedge.com)
View: Selling rallies to remain the play, low 1.30’s ideally
Nothing moves in a straight line as they say and this afternoon’s EUR/USD squeeze is a case in point. Some confidence from the ECB helped, with Draghi placing a positive spin on recent efforts by the central bank to prevent a credit crunch while reaffirming that a further 3-year LTRO would be held in February (we knew this but it shows the bank remains committed to QE providing liquidity). Markets also seemed cheered by his observation that there had been some signs of stabilisation on the economic front. This allowed traders to place more weight on successful Spanish and Italian auctions we saw earlier in the morning. An added kicker came from weaker US figures which hit screens as Draghi began – particularly retail sales for December (0.1% m/m vs. 0.3% median) – which helped pull the rug from specs that had bought into the idea that every US number would continue to surprise on the upside (relative outperformance of America does not mean a boom)………..
Full Report attached:
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