Nice Bounce, shame about the fundamentals

September 27, 2011

Global Macro

Last night was a strange night and it certainly looked more like a reaction to what might have been a pessimistic crescendo in Asian trade rather than anything concrete emerging. Indeed the quote of the day must go to one of my favourite analysts, Kerry Duce from ANZ who wrote this morning,

 In the inverted world of EU speak markets rallied and safe haven positions in bonds were trimmed on assurances from the EU that they do not have a plan. 

So just why and how markets rallied on a plan that is apparently being cooked up but which European politicians such as German Finance Minister Wolfgang Schauble seems to be disavowing is a miracle of the markets from where I sit this morning.

But it’s not really when we think about what happened yesterday in afternoon trade. From a purely trading perspective some important targets across multiple markets were actually satisfied. Take gold for example it fell all the way down to 1533 USD an ounce which was just USD 5 shy of the 200 day moving average which is big important support for traders. It then bounced sharply and is now around USD 100 higher at USD 1630 as I write.

Likewise the AUD broke the Friday night low and then traded down to 0.9633 but it did not break through the 138% projection level of the recent hourly move at 0.9608 and, on a daily basis, has continued to hold the important support I have highlighted over the past week.

So this could all just be a short covering bounce within a downtrend that is starting to emerge in anything that has either growth or risk attached to it. indeed last night industrial metals continued to fall even as the AUD rallied.

In terms of this European malaise it seems to us that it is not going to lift in a hurry and i saw an article yesterday in the Huffington Post that I thought was interesting in terms of a historical comparison with the First World War and the slide into it.  The author, Robert Kuttner poses the question in the title of the article as to “Can Europe be spared cascading collapse” and then goes on to say in the opening paragraphs,

The failure of the European authorities to arrest the speculative run on Greek bonds and the sense of inevitable wider collapse reminds me of the diplomatic failures that led to World War I.

In the summer of 1914, myopic bluffing by Europe’s key leaders produced a catastrophe that nobody wanted. It began in Serbia, a small nationalistic province of a decaying Austro-Hungarian empire, but the conflagration soon spread to all of Europe like a chain of firecrackers. No leader was farsighted enough to grasp the wider common stakes and head off disaster. Each pursued only narrow self-interest.

The impending economic collapse of Europe is looking like one of those avoidable calamities in slow motion.

Here are the elements of the Greek crisis, its wider ripple effects, the diplomatic paralysis, and the solution that seems beyond the grasp of European politics.

That’s essentially what we have been saying for ages now, although he said it much more eloquently.

Last night’s rally is last night’s rally and I am not going to quibble with the price action. but last night also showed an enduring break between hopes for Europe and delivery on these hopes. It seems the rift between the ECB and politicians remains wide and with 6 weeks till the meeting on November 3rd with which to deliver the so-called rescue package European political leaders have plenty of time to disappoint us all – again.

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