Lighthouse Morning Market Wrap – We await Europe, Again!

It’s a big week for Europe – again

Even though Europe was under pressure when the US markets opened the rally in Financial stocks, which finished the day +1.4%, helped the US markets have a much better day than may have been expected. At the close of play the S&P 500 was up 0.34% to 1327 and the Dow rose 0.28% to 12568. How financials rise after Moodys downgraded everyone is hard to fathom unless you take the view that Moodys move late and don’t really matter that much anymore except at the margin. Clearly the market is taking that view.

The EUR and other currencies found support Friday and closed off their lows but still under pressure. The ECB’s move to widen acceptable collateral, the second time in six months, to ease constraints in funding markets helped at the margin and certainly overshadowed disappointing German Ifo data, but in truth it can only ever be marginally helpful. Good news in Spain though with buying entering the market with the 10 year closing at 6.38% from much higher levels earlier in the week.

The big four economies of Europe got together and announced a €130 billion pro-growth package but it all still seems like papering over the cracks. Because whatever the facade of working together for the common good of the common currency self interest is still the dominant theme. Southern Europe needs German money on as few terms as possible and Germany only wants to advance money on its terms.

German Finance Minister Schaeuble reiterated this fact again over the weekend as Reuters reports this morning that he said,

in an interview with German TV network ZDF that Greece has not done enough to fulfill promises it made in exchange for bailout funds. Schaeuble also criticized the recent interventions by U.S. President Barack Obama.

“We have to fight the causes,” Schaeuble said. “Anyone who believes that money alone or bailouts or any other solutions, or monetary policy at the ECB — that will never resolve the problem. The causes have to be resolved.”

Schaeuble added: “It’s not going to help to take money to it. The decisive thing is to credibly fight the causes of the crisis. It’s succeeding very well in Ireland and Portugal. It’s not succeeding very well in Greece. But it must succeed in Greece. There’s no other way to do this.”

Schaeuble said Greece has clearly not done enough.

“Greece hasn’t tried enough so far, that has to be said quite clearly,” Schaeuble said. “That has to be said with respect for the domestic political difficulties. But no one on earth who has followed this issue would think that Greece has fulfilled what it has promised.

Italy and Spain are different on this question,” he added. “They’re making great reform efforts.”

So even as the week builds toward the EU summit it’s still looks like we are some time away from the hallowed save all Eurobonds. Indeed reiterating my point above about Germany CNBC reported that,

Angela Merkel believes that she can restore market confidence by driving euro zone leaders to sacrifice overall control of their budgets to Brussels. Years after that fiscal discipline is forever enshrined in the euro zone, Merkel said there could be joint issuance of debt.

But when the Big Four met in Rome on Friday, the France’s new president, Francois Hollande, was brutally at odds. Hollande said it should not take 10 years to introduce euro bonds, and he directly challenged Merkel to give ground now on key issues in exchange for her fiscal union. Or as Hollande put it, “There can be no transfer of sovereignty if there is not an improvement in solidarity.”

There we have it – the European conundrum writ large.

Lets have a look at some of the markets we follow.

CRUDE: We noted Friday that crude oil needed to close above the important support zone around USD 79 Bbl otherwise it was going to open up significant downside. Tropical storms in the Gulf contributed to more positive price action and in the end Nymex Crude dragged itself back above 80 for a rally of more than 2% on Friday and a more positive outlook though still tenuous techically. I have placed a tentative downtrend line in the chart above which could offer resistance on any rally should it come.

Here is a link to a great piece by Scott Barber on Reuters about crude at the moment it is his usual chart filled cornucopia – he posits the question of whether crude is reacting to excessive speculation or really is signaling an economic slowdown. It’s worth a read but quickly readers know that we like to watch the economic surprise indices and his chart of Crude versus the surprise tells you, like the Aussie Dollar recently it is about growth at present.

EUR/USD: We know the top of the range at the moment is 1.2750 we re just looking for the bottom which last week was 1.2518. My personal bias remains for the EUR to head lower again but in a broader sense I think we might be heading into a period in markets of less volatility on a week to week and month to month basis. Time will tell as we have to build the range but for now EUR is looking for a sustainable bottom.

AUD/USD: The AUD, like the EUR and crude, found some support just above 1.00 over the last week. Certainly the CFTC data shows that the buying up to 1.02 last week and the support over the past couple of weeks has been on the back of short covering by speculators. The market is still structurally short but positions are less extreme than they were. Trading wise support at 1.00 needs to break short term to open up further downside – the stop on my short position has been tightened.

ASX 200: Just quickly on the ASX 200 we see the established range for June needs to break for the next trend to begin .

On the Data Front

We’ll be watching the regional surveys of activity in the US this week as key indicators of just where growth is headed for the US at the moment. Will it confirm the recent deterioration in the growth outlook? .

Have a great day

Greg McKenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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  1. ASX 200 opens terribly | Lighthouse Securities - June 25, 2012

    […] this morning with falls across the board. Already the bottom of the range we talked about in this morning’s market wrap has given way and if the ASX closes below the bottom of the range today then the outlook is for at […]

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