Key News
* BOJ easing likely if Tokyo intervenes in FX (Reuters)
* U.S. Averts Default as Obama Signs Bill (WSJ)
* Italian bonds under fire on gobal economic worries (Reuters)
* U.S. Sovereign Rating Is Placed Under Review by Fitch (Bloomberg)
The Event Agenda
Afternoon Run-Down
There continues to be a risk-off theme in markets – and for good reason.
And there continues to be a breakdown in the “crisis-era” correlations that we’ve seen in recent years – where risk-on has meant buying everything and selling the dollar and U.S. treasuries … and risk-off has meant the exact opposite.
In recent weeks, given the simultaneous drama surrounding European and U.S. sovereign debt, the favored safe-haven trades have been long Swiss francs, long Japanese yen, long gold and long U.S. Treasuries. The dollar hasn’t participated.
The Swissie is making record highs against both the dollar and the euro. And the Japanese yen breached its March all-time record high against the dollar yesterday, trading at 76.28 before reversing sharply on rumors of official intervention.
Here are the three monster issues facing markets:
1) A continuation of record stress in European government bond markets, even after the most recently “resolution” plan out of Europe.
2) A complete fumbling of policy in Washington from inept and sleazy politicians.
3) A clear threat of recession in the manufacturing data of China, the euro zone, the U.S., and the UK – i.e. the second half of global recession is coming.
There is a heavy slate of central bank meetings this week. But the conversation has changed, away from speculation of reversing emergency policy measures, and back toward speculation that more easy money – for longer – may be needed.
The RBA weighed in last night. They held the line on rates citing an “acute sense of uncertainty in global financial markets.” Though the RBA had a hawkish tone, the markets are beginning to price in cuts in the future.
The ECB and BOE meet on Thursday. Both are expected to make no changes to rates.
On Thursday night, the BOJ will convene. There are rising prospects that they may increase asset purchases (more easing) to combat the effects of the strong yen.
With the debt/deficit bill passed in the U.S., the communications from the ratings agencies should be watched closely. If an indication is made that the AAA rating will be downgraded, it will be important to watch the behavior of the dollar and U.S. Treasuries. Given the global impact of a downgrade, it’s likely the dollar and U.S. treasuries will, again, be safe haven trades. On the other hand, if these two key proxies of global safety do in fact get punished, don’t be surprised if we see concerted G-7 intervention to stem the panic. They may pre-empt chaos by coordinating intervention in USD/JPY … under the guise of helping the Japanese. A stable dollar and U.S. Treasury market will go a long way to manage global confidence and fear.
Here’s a look at the charts …
Key Charts
Euro
The euro made another vicious spike from 1.38 to 1.45 in the middle of July, briefly violating the descending trendline that marks the decline from the May highs. But that trend remains intact. A series of lower highs are in place … and a lower low on this move down brings into play the huge trendline from the June 2010 lows.
If that line gives way, expect the 1.3050 area, the 61.8% retracement of the move from 1.1875 to 1.4939, to be the major long-term technical level the market hones in on. The sustained breach of the 100-day moving average (the red line) has proven to be of significance in this crisis 3-4 year crisis period.
Gold
The continued safe haven favorite is Gold, up 12% since the first of July. The top of the channel comes in around $1,690 to $1,700 area. A pullback to the bottom of the line projects $1,500.
S&P 500
Stocks are looking very ugly. As the key proxy for global risk appetite and global economic health, the S&P 500 is staring down the barrel of 1,100 … then 1020 … then the big level of 937. These levels represent the key Fibonacci retracement zones. Yesterday we got a break of the 200-day moving average. And today we’ve broken below the major ascending trendline, marked by the 2009 bottom at 666.
10-year yields
Yields continue to slide on the heightened global risks, trading at 2.62%. That’s the lowest levels since October of 2010. The post Lehman low was 2.42% marked in December of 2008.
