Key News
* Demand for U.S. Assets Increases More Than Forecast (Bloomberg)
* Spain, Portugal Debt May ‘Snowball,’ EU Draft Says (Bloomberg)
* China regulator warns on property, local gov’t risks (Reuters)
* Brazil central bank calls auction to buy dollars (Reuters)
The Event Agenda
Afternoon Run-Down
Global stocks, commodities and currencies are continuing a six day retracement. The theme: improved confidence that economies are giving attention to debt and deficit problems. When the G-20 broke camp two weekends ago a PR campaign followed.
Fiscal consolidation was the main feature of its communiqué. No longer was it coordinated easy money to promote recovery. Then EU finance ministers met a few days later and spoke of aggressive budget cuts. Then followed Bernanke’s testimony that included projections for better US growth … and then a slew of global officials that had upbeat comments on global growth and downplayed concerns on sovereign debt threats.
Given there was no fresh negative news on the sovereign debt front last week, the above provided enough reason for some short term profit taking in the risk aversion trade (long dollars, short stocks, short commodities)—and has ultimately led to a squeeze shorts.
The euro bounced from a low of 1.1877 on Monday of last week to a high of 1.2350 today. And the U.S. stock market (perhaps the best proxy of global risk appetite) has bounced 6.5% in six days.
Nothing fundamentally has changed. But markets don’t go in a straight line. We know the euro zone $1 trillion backstop threat was bold enough to buy some time.
A Bank of International Settlements (BIS) report out this week breaks down the exposure of European banks to the shaky debt of the euro zone—in sum about $1.5 trillion. German and French banks hold about 61% of it, hence the decision of the stronger Emu members for an “all-in” effort to stabilize the deteriorating conditions within the monetary union.
Moody’s downgraded Greece to junk bond status yesterday. And questions continue to mount about the conditions in Spain. Despite the risk-on retracement in global markets and the euro, Spanish yields have been climbing to new wides against German yields, indicating the market’s anticipation of growing threats.
Here’s a look at the charts …
Key Charts
Short Squeeze in the Euro
The market has been leaning heavily against the euro—a record short position. Expect bounces in the euro to be sharp as weak shorts all head for the exit doors.
Euro correction
How far can the euro retrace? The long term trend line from the November highs (white line) suggests the 1.27 area is major resistance. More importantly, watch the European risk proxies (govt’ bonds, CDS, financial system liquidity) for cues.
S&P 500
The 200-day moving average (yellow line) should offer resistance for stocks—especially given the fragile risk environment. But a break would present a scenario where stocks could build a right shoulder over the coming months topping out around 1150, before breaking down again.
Crude Oil
Crude is also testing the 200-day moving average (yellow line). A technical point that has historically contained price trends.
European Bank Exposure to the PIGS
BIS report shows European banking system on the hook for $1.6 trillion worth of PIGS debt …
Spain Gov’t Bond Yields
Despite the bounce in the euro, Spanish 10-year government bond yields continue to new “wides” against German yields …
