The Euro rally is fading fast, with EURUSD trading all the way back down below 1.2800 as we move toward the US equity close after nearly hitting 1.3100 in early Europe. This has created an enormous shooting star candlestick on the daily chart. Greek spreads re-widened considerably late in the day, though there was no sign of this widening elsewhere. In general, risk was back, even if the Euro resurgence generally faded.
The market seems to be telling us that it wants to believe that risk is worth putting back on globally and that any EuroZone problems are sufficiently covered over by this bailout package to prevent the kind of global contagion the world was fearing as recently as Friday of last week even if the Euro itself is too risk a bet at present. This story is a tough sell, considering the global economy's interconnectedness, but these themes can persist for some time, just as the EM/US decoupling theme persisted for so long before the meltdown started in earnest in 2008.
The new broader line in the sand for risk across markets is the 55-day moving average in the S&P500 around 1162, which is not coincidentally the high for today in the index as well. It’s hard to believe that the S&P index was testing the 200-day moving average support below 1100 on Friday. These are tremendous moves and traders in all instruments need to take the new levels of volatility into account when trading.
UK - the sell the pound coalition?
Elsewhere, news that Gordon Brown is stepping down from Labour and that the LibDems and Labout were opening coalition talks was justifiably met with a pound sell-off. Any coalition of this type will be very bearish for the pound as the two parties would also need to pull in other parties, like the nationalist ones from Wales and Scotland. Such a coalition would have a hard time creating consensus and coming up with a strong move to stem the risk of a fiscal crisis in the UK as each member of the coalition looks to press its specific agenda and special budgetary handouts. The market has not reacted as strongly as one might expect on this news, as LibDem/Labor coalition talks might be a ploy by the LibDems to press the Conservative on their key LibDem issues, especially a reform of the electoral system.
Elsewhere, news that Gordon Brown is stepping down from Labour and that the LibDems and Labout were opening coalition talks was justifiably met with a pound sell-off. Any coalition of this type will be very bearish for the pound as the two parties would also need to pull in other parties, like the nationalist ones from Wales and Scotland. Such a coalition would have a hard time creating consensus and coming up with a strong move to stem the risk of a fiscal crisis in the UK as each member of the coalition looks to press its specific agenda and special budgetary handouts. The market has not reacted as strongly as one might expect on this news, as LibDem/Labor coalition talks might be a ploy by the LibDems to press the Conservative on their key LibDem issues, especially a reform of the electoral system.
Chart: GBPUSD
GBPUSD continues to gravitate toward the huge 0.618 Fibo retracement level for the move from the 1.3500 low to the 1.7040 high at around 1.4860. Note that we are closing on this area today after closing not far below this area on Friday.
GBPUSD continues to gravitate toward the huge 0.618 Fibo retracement level for the move from the 1.3500 low to the 1.7040 high at around 1.4860. Note that we are closing on this area today after closing not far below this area on Friday.
Looking ahead
We'll continue to watch the developments in risk appetite in coming days to get a feel for whether this risk rally has legs. Our belief is that it could fade quickly beyond this week if not beyond today, but let's see how the market behaves and if volatility can come down from these incredible moves we've seen over the last few days. If risk appetite is able to maintain strength here, this could result in a renewed focus on the old simple interest rate differential arguments, in which case the weak G3 theme would likely return with a vengeance. RBA vs. Fed expectations, for example, have hardly changed through all of the recent turmoil.
We'll continue to watch the developments in risk appetite in coming days to get a feel for whether this risk rally has legs. Our belief is that it could fade quickly beyond this week if not beyond today, but let's see how the market behaves and if volatility can come down from these incredible moves we've seen over the last few days. If risk appetite is able to maintain strength here, this could result in a renewed focus on the old simple interest rate differential arguments, in which case the weak G3 theme would likely return with a vengeance. RBA vs. Fed expectations, for example, have hardly changed through all of the recent turmoil.
Note:On the more humdrum note, a glance over at the economic calendar: tonight we have UK BRC Retail Sales monitor and the best leading index of the housing market, the Apr. RICS House Price Balance. The RICS survey is pointing to rapidly slowing momentum in the UK housing market. Some Chinese numbers are also out in Asia after China's trade balance barely registered a surplus for April.
Highlights for the rest of the week include Germany's Q1 GDP number and the UK BoE Quarterly Inflation Report on Wednesday. The US Mar. Trade Balance is also out Wednesday. On Thursday, we have the Australia Apr. Employment Report and UK Trade Balance. Finally, Friday features New Zealand Mar. Retail Sales, US Apr. Advance Retail Sales, and the first look at the April University of Michigan Confidence number.
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