Key News
* Best Currency Forecasters Say Dollar Slump Coming to an End (Bloomberg)
* EU Stress Test Data May Cause Market Instability (Bloomberg)
* Dutch FinMin: Greek Selective Default Not Ruled Out (iMarketNews)
* China’s Wen Says Inflation Top Priority; Will Watch Growth (iMarketNews)
The Event Agenda
Afternoon Run-Down
As the global markets shifted toward the European time zone this morning, markets were scrambling out of risk. Chinese stocks were down 1.7%, Hong Kong down 3%, India down 1.5%, Australia down 1.9%, the S&P futures were down 1% and commodities were getting nailed … all following the decline in the euro, which was down 1.4% at one point, breaching its May lows and slicing through the 200-day moving average.
But in the face of debacle in Europe, the euro later turned on a dime and the risk environment turned with it. Rumor had it China was buying European sovereign debt, followed by rumors it wasn’t China, but the ECB. As sovereign debt yields turned, so did the euro … so did global markets.
Articles over the weekend on Europe introduced a change in the conversation among euro officials – now to include a Greek default. Though today, the official message is mixed, the Dutch Finmin said it wasn’t ruled out, while others said default (“selective default”) wasn’t going to happen.
Meanwhile, Europe braces for bank stress tests to be published on Friday. The stress tests are said to include scenarios where:
Ø The euro zone contracts ½ percent in 2011,
Ø A 15% drop in European stocks,
Ø As well as “possible trading losses on sovereign debt.”
Germany’s banking associations are apparently warning that the report could be too detailed, exposing weak banks to a speculative attack of their own.
Meanwhile, as if they were oblivious to the above events, the IMF upgraded German growth today – in what appears to be yet another attempt at official sentiment manipulation. Of course, they succinctly hedge themselves by saying there are “risks” to their forecasts from “financial spillovers into Germany.”
Back to reality: A report on the U.S. economy from the Fed Bank of Cleveland says the U.S. economy in 2012 may grow at just 1.1 percent – that’s less than half the 2.7 percent to 2.9 percent range projected by the Fed in its official estimates.
Here’s a look at the charts …
Key Charts
Euro
The euro looks very slippery here … it broke definitively below the 100-day moving average (the red line) yesterday, which has contained it since early this year. And the steep slide this morning took it through the 200-day moving average (the dark line). The next big support comes in at the 1.3710 area – the ascending trendline that describes the retracement from the June 2010 lows of 1.1875.
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.
Gold
With the euro leading the risk aversion theme, gold and the dollar are, again, trading in a positive correlation. Gold sits just 8 bucks off of its May highs in dollar terms of $1576 and has already reached new record highs in euro terms.
S&P 500
After posting one of the biggest one week surges on record, the S&P 500 is reversing course. The bearish outside week from May still holds, potentially marking a significant turning point for stocks and global risk appetite. A break of the blue trend line, which coincides with a break of June lows opens up big downside.
Crude Oil
The charts for global risk proxies (the S&P 500, the euro and crude oil) are all near a significant technical breakdown of the uptrend of the past year. Crude is also forming the right shoulder of a bearish head and shoulders pattern that projects a move down to $60.
