The ash cloud from the Icelandic volcano swirling over Europe has not only delayed millions of tourists from reaching their destinations, but all manner of business has ground to a halt, including fresh bailout talks scheduled between Greek authorities and the EU/IMF. The calling of these talks had sparked some outrage in Greece, where some in the populace are now fearful of even more dramatic austerity measures aimed at clamping down on spending. These fears were justified when the EU's Juncker that new austerity measures would be discussed at the talks. The talks have been rescheduled for Wednesday rather than today.
Spreads on Greek debt were at their widest since the entire debt debacle began in earnest late last year, with Greek 10-year spreads to Bunds trading at over 450 bps as of this writing. Interestingly, the contagion story is getting some traction as well, as Portuguese spreads have widened out to 150 bps - close to their February peak. There were no real clear signs of distress in the other "PIIGS" countries' debt. Outside of EURUSD and EURJPY, which were driven lower by the general boost to the USD and JPY from risk aversion, however, EUR was holding its own in other crosses - either suggesting divergence and an opportunity to take advantage of mispricing (the cynical angle on the Euro) or showing a bit of resilience (the contrarian angle).
Goldman
The Goldman Sachs fraud charges are being endless discussed. That actual story will take a long time to reach a conclusion - in the meantime, the focus is on the risk of contagion to other investment banks and a deeper investigation of Goldman Sachs itself, the poster child of Wall Street investment banks. As some have pointed out, (and we agree now that we have gained a little 20/20 hindsight from sitting on this story all weekend) it is rather amazing that it took this long for the SEC to come up with something and that it only went after Goldman on a specific deal, rather than charges of more broad market manipulation. This suggest a rather weak SEC effort, unless the regulatory agency is using this case as a Trojan horse to get inside Goldman's books and widen its . For now, the SEC case has seemingly sparked action by UK and European officials, who appear to be on the warpath against Goldman as well (see this story for more).
The Goldman Sachs fraud charges are being endless discussed. That actual story will take a long time to reach a conclusion - in the meantime, the focus is on the risk of contagion to other investment banks and a deeper investigation of Goldman Sachs itself, the poster child of Wall Street investment banks. As some have pointed out, (and we agree now that we have gained a little 20/20 hindsight from sitting on this story all weekend) it is rather amazing that it took this long for the SEC to come up with something and that it only went after Goldman on a specific deal, rather than charges of more broad market manipulation. This suggest a rather weak SEC effort, unless the regulatory agency is using this case as a Trojan horse to get inside Goldman's books and widen its . For now, the SEC case has seemingly sparked action by UK and European officials, who appear to be on the warpath against Goldman as well (see this story for more).
Good old risk aversion
The action since Friday has shown us how the chips will fall if this move into risk aversion continues, with the strongest currencies suddenly becoming the weakest currencies and vice versa. AUDUSD was down through key support, and the USDCAD downtrend is finding itself seriously challenged as well. The biggest fireworks have been in the JPY crosses, where the JPY shorts are getting squeezed on the sharp fall in bond yields, though that fall is seeing some fairly sharp consolidation as we are writing this.
The action since Friday has shown us how the chips will fall if this move into risk aversion continues, with the strongest currencies suddenly becoming the weakest currencies and vice versa. AUDUSD was down through key support, and the USDCAD downtrend is finding itself seriously challenged as well. The biggest fireworks have been in the JPY crosses, where the JPY shorts are getting squeezed on the sharp fall in bond yields, though that fall is seeing some fairly sharp consolidation as we are writing this.
Chart:USDJPY
USDJPY finds support close to 0.618 Fibo retracement of the recent wave and ahead of the critical 55-day and 200-day moving averages. Ichimoku cloud support is a bit lower toward 91.00 and doesn't begin rising until the end of the month. It is important for USDJPY to find support in this area if it wants to keep the already struggling bullish outlook alive.
USDJPY finds support close to 0.618 Fibo retracement of the recent wave and ahead of the critical 55-day and 200-day moving averages. Ichimoku cloud support is a bit lower toward 91.00 and doesn't begin rising until the end of the month. It is important for USDJPY to find support in this area if it wants to keep the already struggling bullish outlook alive.
Looking ahead
Three big issues on the front burner
We've got quite the trio of market risks at present: the EuroZone periphery, or PIIGS story, the brand new Goldman Sachs story, and the possibly imminent Chinese Yuan revaluation. It would seem the market has enough to chew on for the moment to cap any risk appetite for now and the risk bulls can expect a rangebound market at best. The question going forward is whether the situation only results in a couple of weeks of consolidation or whether it has wider implications. Certainly, the economic fundamentals need to make a strong case for continued recovery for the market's confidence not to wobble significantly in the near term.
We've got quite the trio of market risks at present: the EuroZone periphery, or PIIGS story, the brand new Goldman Sachs story, and the possibly imminent Chinese Yuan revaluation. It would seem the market has enough to chew on for the moment to cap any risk appetite for now and the risk bulls can expect a rangebound market at best. The question going forward is whether the situation only results in a couple of weeks of consolidation or whether it has wider implications. Certainly, the economic fundamentals need to make a strong case for continued recovery for the market's confidence not to wobble significantly in the near term.
Or is it four issues?
If we are to add a fourth issue at the moment, it is the upcoming UK election. Today's GBP weakness may have been triggered partially by the situation with the Icelandic volcano, but possibly also by the newfound strength of the Liberal Democrats, who are taking votes from both of the other two major parties and thus increasing the chances of a hung parliament.
If we are to add a fourth issue at the moment, it is the upcoming UK election. Today's GBP weakness may have been triggered partially by the situation with the Icelandic volcano, but possibly also by the newfound strength of the Liberal Democrats, who are taking votes from both of the other two major parties and thus increasing the chances of a hung parliament.
Maybe even five?
Finally, the volcanic ash cloud is pummeling energy prices as jet fuel and other inventories pile up due to lack of demand, though it appears the volcano is emitting ash at lower levels now and the cloud may clear in the coming few days, proving a very temporary event. USDCAD is the primary "energy pair" to trade in FX at the moment. If the volcano goes haywire again, however, the broader market can't ignore the implications on global growth, and not just energy prices. It is very serious business to have most of the airspace in the world's economic zone completely shut down.
Finally, the volcanic ash cloud is pummeling energy prices as jet fuel and other inventories pile up due to lack of demand, though it appears the volcano is emitting ash at lower levels now and the cloud may clear in the coming few days, proving a very temporary event. USDCAD is the primary "energy pair" to trade in FX at the moment. If the volcano goes haywire again, however, the broader market can't ignore the implications on global growth, and not just energy prices. It is very serious business to have most of the airspace in the world's economic zone completely shut down.
RBA Minutes
With the Aussie longs a bit weak in the knees on this bout of risk aversion, watch out for the RBA minutes set for release in the Asian session tonight.
With the Aussie longs a bit weak in the knees on this bout of risk aversion, watch out for the RBA minutes set for release in the Asian session tonight.
Economic Data Highlights
- New Zealand Mar. Performance of Services Index out at 57.3 vs. 53.7 in Feb.
- UK Apr. Rightmove House Prices out at +2.6% MoM and +6.0% YoY
- Japan Mar. Consumer Confidence out at 41.0 vs. 40.0 in Feb.
Japan Mar. Nationwide Department Store Sales out at -3.5% YoY vs. -5.4% in Feb. - EuroZone Feb. Construction Output fell -15.2% YoY vs. -10.6% in Jan.
- Canada Feb. International Securities Transactions out at 6.7B vs. 9.0B expected and 11.8B in Jan.
Upcoming Economic Calendar Highlights
- US Fed's Evans to Speak (1300)
- US Fed's Bernanke to Speak on Financial Literacy (1300)
- US Mar. Leading Indicators (1400)
- US Fed's Duke to Speak (1300)
- New Zealand Q1 Consumer Prices (2245)
- Australia RBA April Minutes (0130)
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