PRIOR WEEK.
Top market movers last week were:
· - Speculation About Coming Greek Elections From
Latest Polls
· - China Stimulus Hope And Disappointment
· - Spiking Spanish, Italian Bond Yields, bad
Italian bond sale
· - Mostly Bad Data, especially….
·
Terrible US Jobs Report: Arguably the most
significant single event last week, for reasons we discuss below
Plenty has already been written about all. We’ll
discuss below what they mean for the coming week, along with the lessons and
ramification for various asset classes.
The short version:
The picture for some is less clear than for others. For one
particular asset type and assets related to it, the week was a likely
multi-month turning point.
Europe, the US, UK, Japan, and China continue to show
evidence of slowing to varying degrees, with the EU continuing to be a
potentially lethal threat to the global economy. If history is any guide, more
money printing is likely on the way. We’ll discuss that in detail and what to
do about it.
1-2. EU EVENT RISK
Of course the EU remains the big threat.
News Feeding Greek Election Speculation
The recent failed election raised the odds of Greece
reneging on its bailout agreements, defaulting, and sparking the dreaded
disorderly default and contagion that risks engulfing the EU and probably
global economy in a larger version of 2008’s Lehman bank collapse. No surprise
that further polls and other news feeding speculation of the results will
continue to move markets. A pro-bailout result allows the EU to continue to
play for time. An anti-bailout government means the EU must decide quickly
about many things, essentially whether to let assorted banks and governments
fail, or print money to pay for them. Yes, perhaps more fundamentally, the EU
needs to decide whether to centralize budgeting authority, become more like the
US of Europe, etc., in order to ensure the EU’s future or just give up and
restrict the EU to the nations that can be saved. However the more immediate
issue is whether to keep a lot of insolvent governments and banks on life
support via various schemes involving more debt and, money printing, or pull
the plug now and decide how the pain is to be distributed.
Other Contagion Threat Barometers
We could see further sovereign and bank credit downgrades
and evidence of rising bond yields, most significantly in Spain and Italy. Both
local events and those in Greece could be a factor.
Watch also for signs of cash continuing to flow out of GIIPS
banks. Last week we started seeing repeated references to “denomination risk.”
The term refers to the risk that depositors could find their EUR deposits
suddenly converted into a new local currency if the nation exits the EZ in
order to regain the ability to print its own money as needed. Such a move would
likely come with capital restrictions preventing residents from freely holding
or exchanging other currencies of more reliable value. If it happens once, fear
of a similar fate for other GIIPS depositors is likely to spark further cash
outflows.
Greece remains the likely flashpoint for now.
3-8. ALL EYES ON CENTRAL BANKS: WHEN WILL THE MONEY PRINTING
BEGIN?
Next week we have 5 potentially significant central bank
events:
4 central bank rate decisions from the RBA,(Tuesday) BoC
(Tuesday), ECB (Wednesday), and BoE (Thursday): Given the dour data in the EU,
US, UK, and China, the bias is clearly dovish, with rate cuts possible from all
but the BoC. There is a growing body of opinion however that suggests that
because a number of central banks are leaning to cutting rates anyway, they
might get better results by announcing a coordinated effort later this month
around the time of the G-20 meetings
The Fed’s semi-annual monetary policy report (Thursday):
Arguably the most significant data out last week were the disastrous US jobs
reports, because the chances of additional US stimulus moved from the possible
to the probable. Markets will be watching for hints of QE 3. We suspect
Bernanke will not tip his hand yet. The Fed’s next policy announcement on June
20th, after both the Greek elections and G-20 meetings. If the elections yield
an anti-bailout government and threat of Greek default, he may feel forced to
act with some sort of stimulus (aka some combination of more debt and money
printing). We suspect he’d prefer to do this as part of a coordinated response
around the time of the G20 meeting. The idea is that the calming effect on
markets would be greater, and volatility in the forex markets would be reduced,
if multiple central banks ease together.
9. MORE EVIDENCE OF CHINA SLOWDOWN
There was more bad data out of the BRICS, though it’s the
major data from China that has the by far the most market moving potential.
Look for more news stories related to the slowdown there or speculation about
the wave of data due out Saturday June 9th. The actual reports themselves are
more likely to affect the opening of the following week.
10. DELAYED REACTION TO US JOBS REPORTS ESPECIALLY IN ASIA
As always, Asian markets are closed by the time the US jobs
reports are out, and so when these reports rock markets as they did last week,
Asia plays catch up at the open. Given the bleak results, Asia will likely be
opening lower and staying there unless there’s new countervailing bullish news.
11. TECHNICAL PICTURE
Using the S&P 500 as our overall risk barometer, the
picture we get from last week is of continued technical breakdown and the door
now open to further lows.
S&P 500 WEEKLY CHART JULY 2009–MAY 2011 04 JUN 03 0353
Source: MetaQuotes Software Corp, thesensibleguidetoforex.com
Note in particular:
The prior week confirmed the end of sideways movement from
February – April and the start of a new leg lower with”
Violation of multiple support levels including the 10
(blue), 20 (yellow), and even the 50 (red) week (= 200 day) EMAs. Violation of
the 50 week / 200 day EMA typically signals the decisive end of the uptrend.
A decisive break below key psychological support of 1300.
The index is now likely to test the 1265 area, which
includes the 61.8% Fib retracement of the prior May — August 2011 decline.
Medium term momentum is now bearish:
–the 10 and 20 week EMAs are now heading lower and the 50
week EMA is now flat
–the index is now firmly in the lower end of its weekly
double Bollinger band sell zone (the area bounded by the lower green and orange
bands), suggesting more downside ahead.
LESSONS & RAMIFICATIONS
Here are a few observations and conclusions from the above.
Gold & Other Currency Hedges Are the Big Winners
Whatever happens in Europe in the coming weeks, the short
and simple version is that all likely scenarios involve either significant or
gargantuan degrees of money printing depending on which one or combinations of
the following we see:
Continued Greek bailout (relatively small in near the term)
Greek default and EU bank system bailout (potentially much
larger, magnitude uncertain depending on how many banks and governments
rendered insolvent and in need of aid)
Stimulus programs of various forms have at best slowed
declines at the cost of piling on more debt and making the ultimate payback
more painful. The only question remaining is how the burden is shared between
nations and between the public and private sector and how. The history of the
past years suggests at minimum the public sector will bear a huge part of the
cost. Because higher taxes or cuts in services are less popular than assorted
forms of money printing that fund more borrowing (they don’t oppose what they
don’t understand), money printing is coming. That may not bring significant
inflation while the global economies continue to struggle, though the risks of
inflation and loss of purchasing power in the coming years clearly are rising.
At minimum we’ve got EUR printing on the menu. Yes, Germany
opposes it. They always have, and have yielded each time when faced with risk
of Greek default and contagion. Maybe this time it’s different. German behavior
for the past 3 years suggest otherwise.
The past three years also suggest a high chance that the Fed
and other central banks will be involved in some fashion.
Leaving aside the EU, Friday’s miserable US jobs reports
alone convinced the markets that QE 3 is once again firmly on the menu.
If you don’t believe me, the gold chart is a fine barometer
of what markets believe about the likelihood of money printing.
First some brief background. As we’ve noted repeatedly, gold
rises when markets fear loss of purchasing power from one or more of the most widely
held currencies, the USD and EUR. It falls when these fears recede OR are
overridden in panic times by the need for liquidity.
Here’s a weekly gold chart.
03JUN 03 0316
What the chart shows: After the initial panic following the
Greek elections of June 6th (liquidity is top priority), gold spiked this past
week, with virtually all of the gain shown above coming on Friday following the
US jobs reports.
What it means: Markets believe that QE 3 has now gone from
being possible to probably in the coming months. That will dilute the value of
the USD like any money printing program is expected to do, feeding demand for
the prime currency hedge, gold.
.
What To Do?
Gold and other currency hedges are likely beneficiaries of
events in the coming week and beyond.
With the USD, EUR, GBP, and JPY all facing continued
printing and low rates, their loss of value, along with anything denominated in
them, is the likely outcome, even if depressed conditions suppress inflationary
pressures in the near term.
Most of us are far too overexposed to one or more of the above
currencies. We all need to diversify out currency exposure just like we need to
diversify by asset and sector type. The problem is, most kinds of currency
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price.
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