Afternoon Run … June 1, 2010

Key News

* Eurozone banks face 195 bln euro writedowns to end 2011-ECB  (Reuters)

* Prudential deal near collapse as AIG snubs lower offer (Reuters)

* RBA Leaves Rates Unchanged (RBA.gov)

* Europe blocks U.S. emergency exit door  (Reuters)

The Event Agenda

Afternoon Run-Down

Global stocks, yields and currencies started the week on soft footing.  But as we’ve seen many times in recent weeks, when the New York session starts, it becomes short squeeze time.  This morning was no different.  The euro traded to new four year lows this morning, only to bounce aggressively … again.

With global market stability tied to the orderly trade of the euro, it’s reasonable to think the ECB, or someone of their behalf, is acting as a speed bump for the euro decline.

Take a look at this 20-day chart of the euro …

As of this morning, we’ve seen four tests of the sub 1.22 area, and four sharp rebounds.  The price action suggests some “official interest” … i.e. central bank activity.   Today was the fourth challenge.  Notice the slope of the rebounds … very similar. 

The fundamental evidence continues to weigh against the euro.  The ECB’s Financial Stability Report was released yesterday and revealed that European banks would likely see another 195 billion euros in write-downs through 2011.  That only pertains to the bad assets associated with the 2008 financial crisis.  As we know, the European banking system also holds a big stake in questionable sovereign debt.

The ECB also said there was a risk of asset price bubbles in emerging market economies from a sharp increase in net investment inflows, forecast to rise by 66 percent in 2010, the biggest annual rise in more than 15 years.

That dovetails with some other “risk negative” news that has weighed on markets this morning …

Fitch downgraded Spain late Friday afternoon, which reversed the warm and fuzzies associated with the big stock market rally of last Thursday.  Further adding to the risk aversion mood, China’s manufacturing activity is rolling over.

The pound is the relative winner today driven by a massive M&A deal that is falling apart. UK based Prudential’s is balking on its $35 billion bid for an AIG unit, a theoretically pound negative/dollar positive deal.  Given the deal may be dead, the currency market influence is being unwound – putting upward pressure on the pound. 

The G-20 meets this Friday and Saturday in South Korea.  While China’s currency had been expected to be a hot topic, the problems in Europe and global deficits will likely dominate.

Finally, we’ve had two central bank meetings this week.  The Reserve Bank of Australia held-the-line on rates overnight.  After its 25 bps hike to 4.5% last month, the RBA suggested that rates had reached “average levels.”  Today’s hold on rates and the reiteration of their view that rates were now average suggest this rate hiking cycle is on pause for the foreseeable future. 

The Bank of Canada raised rates this morning from 25 basis points to 50 basis points as expected – the first g-7 country to start raising rates post financial crisis.  But the BOC’s statement was one of caution—recognizing the threats in the global economy and the need for continued monetary stimulus.

Key Charts

 Euro

In the past thirty days the euro has fallen from 1.3361 to today’s low of 1.2111.  With a number of signficant technical levels already broken, look for any bounce to continue to be sold …

Euro vs British Pound

With the outlook for the Prudential/AIG deal looking grim, euro/gbp has broken down … trading to new 18-month lows.

S&P 500

Last Thursday’s rally in the U.S. stock market was one of the strongest days for stocks dating back to the middle of the financial crisis — when volatility was more than twice current levels.  A short squeeze or something of signficance for the bulls to hang their hats on?  Given the lack of strength since, it looks like a selling opportunity.