Tag Archive for: ($WTIC)

DougD

It?s All About the Euro

Wednesday will be all about the Euro. That is the day that the European Central Bank announces the result of the next tranche of its quantitative easing program, the LTRO, or Long Term Financial Reorganization policy.

This is the program that allows European banks to borrow unlimited funds at 1% with no questions asked. This is very important for all asset prices worldwide, since the cash pouring out of the continent has been the primary driver of asset prices skyward since December.

It is safe to say that ?500 billion is in the price. That is what the beleaguered currency?s rally from $1.26 to $1.35 has been all about. The unwind of Euro shorts in the sterling and yen crosses have also been a factor. If the ECB delivers ?1 trillion instead, the Euro will pop to $1.37 and risk assets everywhere will rally. If they don?t, expect a low volume bleed off in prices, and the long awaited correction to begin. It is a coin toss which way it will go, so I shall watch from the sidelines.

Anticipation of more sugar infusions from the government has sparked the monster rally in the sovereign debt markets that I predicted last month. Spanish ten year bonds have fallen from 5.8% to 5.5%, while similar Italian yields have made it all the way down from 6.0% to 5.4%. That is quite a long way from the 8.0% peak we saw as recently as December.

Oil has been another new assist juicing the Euro. If the Euro falls, then the local cost of fuel in Europe would rise sharply, as oil is prices in dollars. This would exacerbate the recession already in progress on the continent. These concerns could prompt ECB president Mario Draghi to delay further interest rates cuts, generating more Euro strength.

If we do get the move to $1.37, that should clean out a big chunk of the remaining shorts, which have dropped recently, but are still huge. Since January 24, total shorts have fallen to 142,000 contracts, down from the all-time high of 171,000 contracts. That works out to $17 billion of underlying remaining on the short side.

Get the Euro back up to $1.37 and it might become an attractive short again. It?s just a matter of time before the market refocuses on Europe?s underlying fundamentals, and those are dramatically worsening by the day.

 

 

 

DougD

?RISK OFF? Strikes Again

You would think that this was going to be a good day. Weekly jobless claims fell to 388,000, a new six month low. New permits for home construction in October were up 10.2%. The October CPI even fell by 0.1%.

But the second that Spanish bond yields spiked, it was all over but the crying. The S&P 500 opened weak, and then proceeded to plunged 25 points, decisively breaking a triangle to the downside on the charts that has been narrowing for the past three weeks. Once again, improving fundamentals in the US were trumped by contagion fears in Europe. If you don?t bounce off the 50 day moving average on Friday, then we?ll be on the Lexington Avenue Downtown Express to 1,150 or worse.

The ?RISK OFF? nature of the move across all asset classes could not have been more clear. Oil skidded by $5, gold gave up $65, silver pared $2.20, copper gave back 15 cents. Ten year Treasuries, which never believed in this ?RISK ON? rally for two seconds, received a nice little boost, but not as much as you might expect. Perhaps we are near a top in this most bubblicious of asset classes? In the meantime, the (TBT) was beaten like a red headed stepchild.

One cannot underestimate the impact of the bankruptcy of MF Global, which has deprived the market of $600 million of trading capital. It is particularly serious in the metals and energies, where MF was particularly active. Hence the gut churning moves. The peripatetic CNBC commentator and Tea Party founder, Rick Santelli, is finding out that ?let the chips fall where they may? means that all his friends on the Chicago CME floor get fired.

Strangely, the Euro, the currency that everyone loves to hate, was one of the best performing assets of the day, down less than a penny. The headline risk here is huge. Will the European Central Bank continue buying enough bonds? Forex traders tell me this is because of a number of temporary, one off factors like European bank repatriation of funds back into Euros to shore up their balance sheets and Asian and Middle Eastern central bank purchases of high yield PIIGS bonds. The second shoe has yet to fall on this beleaguered means of exchange.

 

 

 

 

 

 

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