Afternoon Run … June 22, 2010

Key News

* Japan sets ambitious fiscal goals, eyes tax hike  (Reuters)

* Osborne presents ‘unavoidable’ Budget (FT)

* China nudges trading band higher (FT)

* Despite U.S. Plea, European Bank Pushes Austerity  (NY Times)

The Event Agenda

Afternoon Run-Down

The change in China’s currency policy toward a more “flexible” yuan was big news yesterday.  And the interpretation of what it meant was all over the map.

In the short term, China diffuses tensions going into the G-20 this weekend by showing their willingness to start appreciating the yuan – and  keeps U.S. Congress from boiling over anytime soon.

In the end, does it prevent a rise in protectionism?  Not likely.  What it does is diversifies some of China’s risk away from a plunging euro by moving away from a dollar peg to a trading band based on a basket of currencies — of which the dollar is far less weighted.  Perhaps their biggest concern is a continued rise in the dollar – a scenario that has effectively “revalued” the yuan against many of China’s trading partners, including its biggest:  Europe.

Many markets gapped on the open Sunday night, reflecting a sentiment that the China news would be global growth positive.  But the moves were sharply reversed by the day’s end.  We now have technical reversal signals (bearish outside days) in key markets like the euro, U.S. stocks and gold – perhaps an end to the short lived, but violent correction of the past two weeks.

Fiscal consolidation continues to be the theme.  Europe has rolled out its austerity plans and today we got details on UK and Japan plans.  Former Bank of England policymaker says the budget cuts will “certainly” put the UK economy back in recession.

With the U.S. still airing on the side of pro-stimulus to protect recovery, a growing division in what has been coordinated global policy should make for an interesting G-20 meeting this weekend.

Beneath the surface of all of the China and fiscal consolidation news/debates, is (still) Europe …

*EU’s Juncker Says Recovery “remains fragile … loaded with risks”

*S&P official tells Reuters Insider TV Spain needs additional measures to meet fiscal targets

*ECB Noyer:  European banks face funding problems

* Goldman Sachs reduced its crude price forecasts today because the market is “fragile” on concerns that growth in Europe and China will slow.

*Fitch downgraded French bank BNP Paribas’credit rating

*Credit Agricole warned of rising loan losses from its Greek unit

Here’s a look at the charts …

 

Key Charts

Euro

After retracing 5% in 10 days, the euro held trendline resistance and reversed to put in a a bearish outside day … giving the technical signal for a resumption of the downtrend in the euro.   

S&P 500

The picture looks very similar in stocks (another key risk proxy).  The reversal yesterday marked a bearish outside day, after holding trendline resisitance.  Morevover, shorter trem moving averages are near a crossing point that would signal an exit from the longer term bull trend.

Gold

After breaking-out to new all-time highs, the bearish outside day suggests a false-break scenario for gold with a correction targeting the 200-day moving average of $1125.

Chinese Yuan

When China de-pegged the yuan in 2005 it allowed a 2.1% climb the first day.  They proceeded to let the yuan rise by roughly 6% a year until returning to a peg in 2008.  Since de-pegging yesterday, the yuan has strengthened by only 21 basis points against the dollar.  The market is pricing in just a 2.5% appreciation in the yuan by this time next year.