Trichet said risk signals in the EU are flashing red and frustrated QE hopefuls got no traction from Bernanke’s press conference yesterday. Is this the beginning of phase two of a risk sell-off?
After touching close to 1.4500 on the recent euphoria surrounding the Greek parliament’s confidence vote on Tuesday (and the merciless squeezing of fresh Euro shorts), the Euro is tumbling suddenly again after Trichet’s comments late yesterday as the European Systemic Risk Board met in Frankfurt, as he said that risk signals are flashing red due to the threat to financial stability in the EU from the link between sovereign debt challenges and the EU banking system. Since this statement, ECB year-forward expectations have collapsed by 12-15 bps, and sovereign debt spreads within the EU are sharply wider. The Italian-German 10-year spreads has blown out 20 bps to over 200 bps and is the widest it has ever been.
The Euro is also tumbling (and the USD rising) as Bernanke and company failed to hint at anything in the direction of QE3 in his press conference yesterday, as we suggested the market was anticipating a bit too much from Bernanke and company at this point on the quantitative easing front. The combination of Trichet’s rhetoric, the FOMC’s passivity, and signs of trouble in Chinese money market (though there was a bizarre and sharp rally in Chinese equities overnight, as that market marches to the beat of its own drummer) are conspiring to pose a severe challenge to all of the pro-risk trades from SEK to AUD to equities to crude oil and copper. With all of the fish swimming together, we get the renewed risk of “the move generating the move”, the classic problem of over-correlated markets when there is no way to diversify a portfolio.
Chart: EURUSD
Today’s swoon in EURUSD comes after the tough squeeze higher in previous days into the 55-day moving average area. Momentum is fast building here and the odds of a disruptive move always increase once the volatility cat starts emerging from its bag, but the technical arguments for a further move lower gain more force if the pair first takes out the rising line of consolidation and then the previous two low marks that create that line at 1.4075 and the earlier low at 1.3970. Through this area, and one has good arguments for a full test of the 200-day moving average, now at 1.3850, and possibly even 1.3000 eventually if we look at the longer-term structure.
Today’s swoon in EURUSD comes after the tough squeeze higher in previous days into the 55-day moving average area. Momentum is fast building here and the odds of a disruptive move always increase once the volatility cat starts emerging from its bag, but the technical arguments for a further move lower gain more force if the pair first takes out the rising line of consolidation and then the previous two low marks that create that line at 1.4075 and the earlier low at 1.3970. Through this area, and one has good arguments for a full test of the 200-day moving average, now at 1.3850, and possibly even 1.3000 eventually if we look at the longer-term structure.
USDJPY divergence
It is very interesting to note the strength in the USD as the focus rather than JPY strength as we are seeing this wave of risk aversion. Normally in the past, a strong bond market would mean that the JPY would at least perform as well as the USD, but we are seeing USDJPY rather sharply higher on the day – a development we will continue to watch. Is this the beginning of the yen-weakening “rebuilding” trade, as Japan purchases massive materiel from abroad to rebuild the catastrophic earthquake/tsunami/nuclear fallout damage, or mere momentary divergence or is something else afoot? The next resistance layer in USDJPY comes in around the Ichimoku daily cloud level just below 81.00.
It is very interesting to note the strength in the USD as the focus rather than JPY strength as we are seeing this wave of risk aversion. Normally in the past, a strong bond market would mean that the JPY would at least perform as well as the USD, but we are seeing USDJPY rather sharply higher on the day – a development we will continue to watch. Is this the beginning of the yen-weakening “rebuilding” trade, as Japan purchases massive materiel from abroad to rebuild the catastrophic earthquake/tsunami/nuclear fallout damage, or mere momentary divergence or is something else afoot? The next resistance layer in USDJPY comes in around the Ichimoku daily cloud level just below 81.00.
Odds and ends
The news out of the UK today was not particularly encouraging, with a very weak CBI reported sales number for June, though there was a larger than expected uptick in mortgage loans. Though GBPUSD tacked on to yesterday’s enormous losses with a move below the 200-day moving average (1.6025 area) for the first time since, EURGBP reversed all of yesterday’s gains as the Euro finds itself in the hot seat today.
The news out of the UK today was not particularly encouraging, with a very weak CBI reported sales number for June, though there was a larger than expected uptick in mortgage loans. Though GBPUSD tacked on to yesterday’s enormous losses with a move below the 200-day moving average (1.6025 area) for the first time since, EURGBP reversed all of yesterday’s gains as the Euro finds itself in the hot seat today.
Sweden printed a fantastically low PPI point and rate expectations drooped while risk appetite found itself on the barbecue today – all adding up to weak action for the SEK in most crosses. USDSEK is looking to challenge the key 200-day moving average again - now at just below 6.54.
Chart: USDSEK
USDSEK is also at interesting levels here as it comes close to challenging the 200-day moving average and the interesting 6.54 area, which was also a previous low back in October of last year.
USDSEK is also at interesting levels here as it comes close to challenging the 200-day moving average and the interesting 6.54 area, which was also a previous low back in October of last year.
Just before we go to press, we see the news item flashing across the screen that the IEA will release 60 million barrels of oil to relieve some of the supply situation stemming from the Libya interruptions. Oil traded several dollars lower in the front months and this gave risk appetite at least a brief excuse to attempt a rally. Let’s see – 60m barrels – that’s about 75% of one day’s global oil consumption.
The US data releases today were weak once again, as jobless claims notched an ugly 429k reading and last week’s reading was revised +6k higher. The Chicago Fed’s National Activity Index failed to improve as much as expected and registered another negative reading.
EURCHF notched a new record low below 1.19 today on all of the fresh EU woes and as the Swiss trade balance notched its highest surplus in modern memory on a strong drop in imports.
Looking ahead
The market action this morning is rather intense and the global picture is not particularly supportive for risk takers – but the IEA oil release news item out a short while ago shows how jumpy things can get on the least provocation in the other direction as well. This is a real white knuckle market full of headline risks that can swing things either ways, though the volatility risk remains higher to the downside on the pro-risk trades. With that firmly in mind – stay very careful out there.
The market action this morning is rather intense and the global picture is not particularly supportive for risk takers – but the IEA oil release news item out a short while ago shows how jumpy things can get on the least provocation in the other direction as well. This is a real white knuckle market full of headline risks that can swing things either ways, though the volatility risk remains higher to the downside on the pro-risk trades. With that firmly in mind – stay very careful out there.
The EU meeting in Brussels is getting under way today, a day that also saw Mario Draghi endorsed as Trichet’s successor for the ECB presidency when Trichet’s term runs out in October. How interesting is it to have an Italian at the ECB helm!
Economic Data Highlights
- Australia Apr. Conference Board Leading Index out at +0.1% vs. -0.1% in Mar.
- China Jun. HSBC Flash China Manufacturing PMI out at 50.1 vs. 51.6 in May
- Switzerland May Trade Balance out at 3.31B vs. 1.44B in Apr.
- Germany preliminary Jun. PMI Manufacturing out at 54.9 vs. 57.0 expected and 57.7 in May
- Germany preliminary Jun. PMI Services out at 58.3 vs. 55.7 expected and 56.1 in May
- Sweden May PPI out at -0.9% MoM and +1.0% YoY vs. 0.0% /+1.9% expected and vs. 1.9% YoY in Apr.
- EuroZone preliminary Jun. PMI Manufacturing out at 52.0 vs. 53.8 expected and 55.8 in May
- EuroZone preliminary Jun. PMI Services out at 54.2 vs. 55.3 expected and 56.0 in May
- UK May BBA Loans for House Purchase out at 30.5k vs. 30k expected and 29.7k in Apr.
- UK Jun. CBI Reported Sales out at -2 vs. +13 expected and +18 in May
- US May Chicago Fed National Activity Index out at -0.37 vs. -0.05 expected and -0.56 in Apr.
- US Weekly Initial Jobless Claims out at 429k vs. 415k expected and 420k last week
- US Weekly Continuing Claims out at 3697k vs. 3670k expected and 3698k last week
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US May New Home Sales (1400)
- US Fed’s Evans to Speak (2300)
- UK BoE’s Posen to Speak (2300)
- Japan May Corporate Service Price Index (2350)
- China Jun. MNI Business Condition Survey (2350)
- Australia RBA’s Lowe to Speak (0300)
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