After a momentous move last week and early this week, markets are violently churning and wondering what to do next. It’s tough to find a catalyst that will take us out of this state of affairs, but the unknowns are known.
The leading headlines late yesterday and earlier today are related to the ban of several EU countries on the short selling of financial stocks. This is a classic case of “been there and done that” if we look back at the 2008 experiment of doing the same thing. Usually what this approach entails is a drying up of liquidity and lack of buyers if nervous longs come in and liquidate their positions further. This is Stock Market Dynamics 101. Next topic please…
As a Bloomberg article this morning and our own Chief Economist Steen Jakobsen points out in his chronicle today (and in other recent comments) the critical issue here is whether Germany steps up to the plate and commits fully to the EU project and whether we get more fiscal union with Eurobonds or whether we get the “EuroMark” and an eventual chaotic political and economic devolution of the EU. There are currently no answers on that question. The Euro remains steadfast at the present as the short sale ban (or the ebb and flow of market confidence?) has at least temporarily sent bank/credit default risk measures in the right direction in today’s trade.
Our last comment in our lead in (that the unknowns are known) is perhaps cryptic for some, but is familiar stuff for those recalling Rumsfeld’s description of the situation in Iraq as the second Iraq war was approaching. The “unknowns are known” simply means here that the market knows what questions it wants answered – but is desperately uncertain what the answers to those questions might be. Those known unknowns are Germany’s decision to go all in on the European Union and the when and what of the Fed’s QE3. Judging from how the US political system dealt with the debt crisis, how EU leaders have so far approached the sovereign debt crisis and the creeping dissent from within the FOMC, there is plenty of further uncertainty to go around on whether these institutions are capable of further decisive moves.
Chart: AUDUSD
AUDUSD and the general risk picture have been joined at the hip lately. The bounce has taken the pair back to the key resistance in the 1.0400 area as the 200-day moving average is also in play here. A more significant bounce in risk could put the 0.618 Fibo and 55-day moving averages in play up above 1.0600 and still not threaten the bearish developments from the recent massive sell-off.
Odds and ends
More signs of pulling out all the stops in Switzerland on the issue of its strengthening currency today, as a Swiss newspaper reported that all political parties would likely “support currency purchases worth hundreds of billions of francs”. EURCHF rose all the way back above 1.10 in today’s trade after nearly touching parity this last Tuesday.
In Japan, Kan’s cabinet forwarded a ¥19 trillion plan for reconstruction projects in the wake of the Fukushima/tsunami disaster from March. One wonders is this could produce better growth numbers for a time in Japan (or counterbalance the risk of downside surprises from weakness in export markets), just as the post earthquake economic activity in New Zealand is the likely source of much of the strength in economic activity there in recent months.
US Retail Sales came in stronger than expected in July and the ex Autos and Gas number for June was revised sharply higher to +0.5% MoM from +0.2%. This and the last couple of jobless claims numbers are a couple of positive signs that represent some relief in the overall very weak picture. On that note – please read our piece on whether the probability of a US recession has been exaggerated of late.
Looking ahead
Today’s Michigan Confidence indicator is not likely to show much improvement after the recent debt ceiling debate, debt downgrade and severe drop in equity markets.
The markets will have a lot to think about this weekend – but likely few answers to the known unknowns.
Be careful out there and have a wonderful weekend.
source from: tradingfloor
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