Today saw triple threat come into play: a significant additional sell-off in Chinese equities (that we neglected to mention this morning's late Europe/Early US update), S&P cut its ratings on Greek debt to junk and cut Portugal's debt a notch as well, and the Senate committee's grilling of current and former Goldman Sachs executives took a decidedly aggressive and at times nasty edge. This saw a capitulation in risk in the currency market and a strong surge in the most liquid bond markets.
There are enough optimists out there to keep Goldman stock from falling farther today, but other financial stocks were off about 3% on the day, and the S&P 500 index lost some 2.5% or more on the day as well, it's worse performance since early February (which was itself a capitulation sell-off that saw the bottom in the market for the cycle the next day).
The impact on risk appetite was certainly felt in currencies, and most intensively, of course, by the commodity currencies. CAD, SEK, and NZD led the downside among the G-10, and the previous two days of a very sharp rally in NZDUSD was wiped out today in one fell swoop. The two strongest currencies were the markets two favorite safe havens, the greenback and Japanese yen.
Chart: NZDUSD
Today's risk aversion took a heavy toll on NZD as the RBNZ meeting approaches. This kind of reversal could be a hard one for the bulls to overcome. Next focus is on the 200-day moving average, which has been in place incessantly since about mid-March
Today's risk aversion took a heavy toll on NZD as the RBNZ meeting approaches. This kind of reversal could be a hard one for the bulls to overcome. Next focus is on the 200-day moving average, which has been in place incessantly since about mid-March
EURUSD, of course, fell sharply as well, though positioning in the market is rather clear: people are already very short EUR and very long currencies like SEK, AUD, CAD, and NZD, so the EUR was actually flat to positive vs. these currencies on the day, which suggests that the short term potential for the Euro to fall further in an environment where risk is selling off is minimal to non-existent.
There is no mystery to what is going on here: risk loathes the kind of uncertainty brought on by the latest events , especially by a panicky outlook on Greece - and the general agreement forming here is that this is a lose-lose situation for Europe. The new wrinkle as we mentioned this morning is the idea of a haircut on Greece's creditors, that will help prevent the EU/IMF from having to take as large a position in digging Greece out of its financial hole. This of course helps to lighten the load on the public sector, but private banks that invested heavily in Greek debt will be burned, especially German banks, and possibly to the tune of tens of billions of Euros, if this is the settlement that is reached in the coming days (time compression is being forced by the market action here).
Elsewhere
There wasn't much of an elsewhere today with the Goldman hearings in progress, but US Consumer Confidence surged much more than expected, though the present situation part of the index remains very low at 28.6. Let's see if the weekly ABC number up after the US close today gives any further color to this number - it has been a disappointment the last two weeks.
There wasn't much of an elsewhere today with the Goldman hearings in progress, but US Consumer Confidence surged much more than expected, though the present situation part of the index remains very low at 28.6. Let's see if the weekly ABC number up after the US close today gives any further color to this number - it has been a disappointment the last two weeks.
Looking ahead
Tomorrow will tell us whether this is a short term panicky move or whether we get a more lasting sell-off. We've got the FOMC up tomorrow - with baseline expectations for no real change in the Fed stance. Meanwhile, we have the Goldman, Greece, and China to busy ourselves with. Have we seen a bottom in volatility?
Tomorrow will tell us whether this is a short term panicky move or whether we get a more lasting sell-off. We've got the FOMC up tomorrow - with baseline expectations for no real change in the Fed stance. Meanwhile, we have the Goldman, Greece, and China to busy ourselves with. Have we seen a bottom in volatility?
Be more careful than ever out there. Greatest risk is often after a period of incessant declines, as the bull rally can suck the oxygen out of the market and have scared away and broken the back of all the bears.
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