Key News
* China rules out option of dumping US debt (Reuters)
* OECD warns on long-term jobless (FT)
* Treasury 10-Year Notes Fall Before Auction Announcement (Bloomberg)
* European Banks’ Hidden Losses May Threaten EU Stress Tests (Bloomberg)
The Event Agenda
Afternoon Run-Down
Deteriorating data in the U.S. contributed to a break down in stocks and commodities and most currencies last week. But the euro and the pound defied gravity, mechanically climbing throughout what was a potential disaster scenario for global financial market confidence.
Technical support gave way in the U.S. stock market, projecting big downside targets, and manufacturing, housing, confidence and jobs data in the key “safe-haven” economy in the world, the U.S., showed clear signs of deterioration, increasing the probability of another economic downturn for the global economy.
But the fear has since subsided. Stocks are clawing back nearly 4% higher from yesterday’s lows, commodities are moving higher and nearly all currencies are rallying against the dollar.
Why? The euro. The euro is where the world looks for cues on sovereign debt health. And it has been rising.
Why would the euro and pound rise while financial markets around the world are coming unglued last Thursday … especially given what was expected to be a gloomy employment report from the U.S. on Friday? The answer: China.
A Medley Report in early June said that “well placed sources” said China would be buying euros to stabilize the euro’s decline. The report also said that both Beijing and Washington recognize the problems associated with an unruly euro depreciation – as does the G-20 I’m sure.
With results from European bank stress tests and other event risks lurking around the corner, it’s safe to say that G-20 officials, with global stability in mind, are far more satisfied to confront these events with a euro sitting at 1.26, instead of 1.15. With that, it’s a good bet China has been propping up the euro in the face of a deteriorating environment for risk appetite.
Meanwhile, Moody’s has placed Spain under review for a downgrade. Spanish savings banks are said to be hiding losses. And Spanish government bond yields are moving back toward extreme wide levels against equivalent German yields … all of this despite the relative calm communicated through a rising euro.
But beware. Here’s what’s coming around the corner that will likely turn tide for the euro and the focus back toward eroding global economic performance, lower global interest rates for longer, and sovereign debt problems … particularly, as it relates to European bank balance sheets.
July 8: European Central Bank and Bank of England interest rate meetings
July 12-13: EU-27 Finance Ministers meet in Brussels
July 14: Fed release minutes from June 22-23 FOMC meeting. Watch for a downward revision on GDP incorporating risks associated with Europe.
July 15: US treasury delivers its semi-annual review on international exchange rate policies
July 23: European bank stress tests results due
Here’s a look at the charts …
Key Charts
Euro
How high can it go? The descending trendline from the November 2009 high of 1.5144 should contain the euro bounce in the 1.2750 area … which coincidentally appears to be nearing just as key events surrounding global growth concerns and European bank conditions will be presented. A selling opportunity …
U.S. Stocks
The S&P 500 broke the neckline of a head and shoulders pattern that projects a move down to 850 level. Today its testing that neckline, now turned resistance …
Deteriorating Data
Last week U.S. consumer confidence plunged to 52.9, a negative surprise. That’s down from a May reading of 62.7.
After a strong recovery in manufacturing in the past year, that activity is rolling over around the world…
And job creation has turned back into job losses … -125,000 last month.
With the expiration of government new home buyer incentives, pending home sales collapsed at the fastest month over month rate on record.
