Key News
* Papandreou Confidence Vote May Decide Fate of Greece (Bloomberg)
* Reserve Bank Weighs Europe Debt in Holding Rates (Bloomberg)
* Fitch: would cut Greece to default on any voluntary debt rollover (Reuters)
* Why Germany must exit the euro (Telegraph)
The Event Agenda
Afternoon Run-Down
The euro zone crisis faces another stiff test later today, a vote of confidence on the Greek government. If at 5pm EST, the Greek PM Papandreou wins a “vote of confidence,” the clock on the next major hurdle begins to tick. From there the markets will be waiting to see if the PM has done enough in reshuffling parliament to pass new austerity measures next week – that is, to qualify for additional aid from the EU/IMF.
If we get a negative outcome in either of these events the markets will immediately begin pricing in default. And chaos will erupt in financial markets.
But it doesn’t end if the Greek PM can win today. S&P and Fitch are now saying that the new EU/IMF plan for Greece, that includes voluntary debt rollovers, will constitute a credit event (i.e. default).
So expect new, even more desperate plans to bubble up out of Europe in the next few days, in attempt to extend Greece’s walk toward insolvency, without triggering a credit event. That’s IF Greece can get past the confidence vote today.
Markets have been conditioned to believe that politicians can continue pulling rabbits out of the hat. As such, the euro has bounced aggressively, again, this week after an aggressive decline for much of last week. And U.S. stocks are bouncing sharply this week after bouncing in front of major trendline support that describes the bull trend in stocks since the March 2009 low. These relief rallies reflect optimism that “the can” will successfully get kicked down the road.
Assuming, Greece gets past today intact, the Fed will be the key event to hold the attention of traders/investors tomorrow. Remember, QE2 ends this month. In April, in its first post FOMC press conference, Bernanke was clear that risks from inflation pressures were outweighing the benefit that more QE would have on improving the employment picture. He reiterated that position in his June 7 speech at the International Monetary Conference in Atlanta. And he used the word “vigilant” in describing the Fed’s requirements to “preserve its hard-won credibility for maintaining price stability.”
With that, and given some better retail sales data and hotter inflation data since this speech was made, expect the Fed to step up its leaning toward inflation risks – perhaps by including the word “vigilant” (a la the ECB) in its statement – and, at the same time, leaving the door opened to more QE should the euro zone crisis erupt. The “vigilance” language should support the dollar vs. the euro.
With risks of a euro zone unraveling, UK banks have been said to be restricting their lending to euro zone banks. Keep an eye on Libor, Euribor, the Ted spread, etc … the risk proxies of 2008 that demonstrated the credit freeze in the interbank markets — which quickly translated into financial crisis and a global credit freeze.
Here’s a look at the charts …
Key Charts
Euro
In my last post I showed the correlation breakdown between the S&P 500 and the euro (which was lagging). That gap closed with the euro decline of last week. For now, the euro continues to hold the 100-day moving average (the red line).
With the Greek solvency continue to flap in the wind, the chart below shows big support areas for the euro. Support #1 is the trendline that represents the sharp retracement in the euro off of the June 2010 crisis-induced lows (related to the “shock and awe” 750 billion euro bailout announcement from the EU/IMF). Support #2 and #3 are significant Fibonacci areas. And finally, support #4 brings the June 2010 lows back into play, 1.1875 … 18% lower from current levels.
S&P 500
The S&P is down 5.8% from its May 1 high – which took place shortly after the Fed’s last meeting/press conference. Big support comes in just under 1250, the line from the March 2009 lows. A definitive cross under the 200-day moving average and break of this line opens up big downside for stocks.
Credit watch
Below is a chart of the TED spread. This was a key indicator to watch at the height of the financial crisis to gauge the fear in the financial system. It measures short term US gov’t rates against rates on interbank loans. You can see, even as the Fed was slashing rates down to zero, the TED spread was spiking because banks were hoarding dollars – unwilling to lend them to other banks – creating elevated consumer rates, while gov’t rates were moving toward zero.
Expect markets to keep a close eye on this risk proxy for information on how global banks are feeling about the outlook in the euro zone financial system.
