Key News
*Big increases in Fed bond purchases unlikely (Reuters)
* Bank Rescue Costs EU States $5.3 Trillion, More Than German GDP (Bloomberg)
*Treasuries Gain After Japan Says It’s Confident About U.S. Debt (Bloomberg)
*Setback for eurozone recovery hopes (FT.com)
The Event Agenda
The Morning Run-Down
There has been a lot of noise driving currencies back and forth over the past four days. In fact, the dollar is trading this morning very near the levels from the opening of the week. It’s important to filter out the noise and conflicting day to day news, and focus on the bigger picture and themes driving markets– and vulnerabilities within these themes.
For now, the key theme driving markets is expectations of recovery. And the key focus in this environment is “beware of negative surprises.” Negative surprises can turn a fragile recovery argument very quickly. A reverse in stock prices can do the same.
In our last Currency Comments I showed the double dip taking place in some critical German data. Today that is translating to the rest of the Eurozone. Industrial production reported this morning was down printed new lows, down 21.6% from the same period a year ago. That’s the steepest fall since records began dating back to 1991. The euro was already moving lower this morning, this news has given it a little punch.
The dollar index tested and held key support last week—the 61.8% retracement of the move from the all-time lows last July to the high made in March. The chart shows the beginning of an impulsive C-wave that should take the dollar higher. And this is all in the face of an onslaught of negative sentiment—an historically good contra indicator.
Adding support to the stronger dollar scenario, longer term Treasuries have also received relentless negative sentiment. And this outside range, a key bullish reversal signal could mean the near term sell-off in longer term Treasuries is over. In a typical economic environment this would mean bad news for the dollar—i.e. lower yields, lower dollar demand. But in a broad reaching global recession the risk aversion trade still ties the dollar and US Treasuries tightly together.
And stocks, though less active in recent weeks, are looking vulnerable to a break down. The trendline below represents the entire move up from the 666 lows in March. Rest assured, a break of this line will summon strong selling pressure. This is bad news for risky assets and good news for the risk aversion trade.
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