Home > Uncategorized > 2011/06/23: Bernanke Fails Confidence Vote After Weaker Forecasts… Equities Suffer Markedly

2011/06/23: Bernanke Fails Confidence Vote After Weaker Forecasts… Equities Suffer Markedly

The downgrade of the near term economic forecast from the Fed was not necessarily a surprise after such soft US employment and housing data and the effects of the earthquake and tsunami in Japan. Yet, the fact that all Mr. Bernanke had to offer was continued accommodation that would be short of further QE and his confidence that things will get better ‘later’ did not play well. In fact, while still clinging to the notion that inflation factors were ‘transitory’, he did cite the many levels on which the damage to the consumer was likely extensive in the short term.

Yet, neither he nor the inquisitors from the financial fourth estate got around to the degree to which inflation was going to remain more than transitory. [For more on that, see yesterday’s post Greek Government Passes Confidence Vote… Will the FOMC and Bernanke As Well?] And the equities were seemingly more sensitive to that burden on “final demand” (as central bankers like to call end-user consumer activity) than when we presumed Mr. Bernanke’s accommodative stance would once again carry the day, as it had back in late April and on other previous occasions. Of course, in spite of the success of the Greek government confidence vote, that situation remains extremely fraught as well. There is a significant question over whether the ultimate implications of the deep debt hole in which Greece finds itself becomes more prominent in the market’s perspective than the near-term liquidity-infusion rescue attempts. Together those set up the prospect of a serious failure in equities much sooner than previously anticipated; including a more pronounced extension of the ‘risk-off’ trade that has dominated since the bin Laden euphoric exhaustion high back on May 2nd.

And technical activity is reinforcing the degree to which Tuesday’s Greek confidence vote relief rally into yesterday may have been a very temporary bear squeeze.  The operative factor is the degree to which the September S&P 500 future had gapped back above 1,274-69 on Tuesday has gapped back below it; which is now a critical indication. The bottom line is that there are times within active trends that the attempted trend reversals are only very nominal and short-lived. In spite of the fact that the September S&P 500 future has been below and back above the 1,274-69 area several times of late, Tuesday’s push above it was an attempt at a reversal signal that might’ve led to a more substantial upside correction back above the 1,300 area. However, regardless of the number of times it had rescued itself from below that range previous, current failure back below 1274-69 will be more telling as a likely signal the aggressive downtrend might well be able to reinstate itself in the near term (more below in EXTENDED MARKET IMPLICATIONS.)

And one of the other factors Mr. Bernanke discussed is likely to weigh on the equities as well: federal fiscal reform in the US should really begin to bite sometime soon. In spite of warnings from him and other financial luminaries, there is a good possibility that it will be significantly advanced as part of any US debt ceiling increase deal. The truly pernicious part of any sharp decrease in US federal spending right now is the degree to which it is pro-cyclical with the heavy state and local spending cuts as those entities also attempt to achieve a budget balance; often with the burden of heavy indebtedness in places such as California, Illinois, and others. As noted yesterday, that and the cooling in previous strong sister economies like India and especially China will mean much more than any successful exercise that avoids a Greek default for now; yet with the latter still a possibility if there is any failure of political will.

EXTENDED MARKET IMPLICATIONS

So the real question is whether September S&P 500 future which just managed to ratchet back above the 1,274-69 interim technical support on Tuesday fails as badly as the violation of the low end of that range suggests. As noted above, this may seem less than critical to the casual observer or passing technical analyst, because the market has been above and below that interim level a number of times in recent trading. However, what is different this time is the degree to which the ‘day session’ gap above it on Tuesday was also an UP Break out of the aggressive downward channel (from the May 31st last hurrah 1,340.50 high prior to the more aggressive downtrend taking hold of the market.) Of note, the UP Break was from pretty much exactly 1,274, and the last minor intraday pullback low on Monday prior to that UP Break was 1,269 (which is therefore the nominal ‘Tolerance’ of the UP Break.)

As such, any failure back below 1,269 on a daily Close would indicate a reinvigoration of the more aggressive downward trend due to a current UP Break failure. That this is all occurring after the most minor bit of intraday trading above the immediate-term resistance in the 1,290-88 area is a further pernicious sign. That would seem to point toward the likelihood of a near-term retest of the more major technical support in the 1,253-44 area which the September S&P 500 future had already tested the top of last Thursday at the low end of the current selloff. The fact that it was still the second contract at the time (as the June contract which had a 1,259 low did not expire until last Thursday’s Close) only creates that much more of an incentive for the market to revisit that low or the critical levels just below it as the lead contract.

Of course, it is already obvious that long-dated government bonds will likely improve markedly on the back of ‘haven’ flows out of equities. That is in spite of the fact that any actual weakening of the economy is not really very good for the overall fiscal calculus which the US government must rely on to solve its own debt-dilemma. However, in the near term the bond markets will be boosted by the sheer ‘fear factor’ as funds flow out of the equity market. The short money forwards will also benefit from the idea that any extended weakness in the equities might be indicative of the sort of similarly extended economic weakness that does not leave any room for central-bank tightening; not even by the still nominally hawkish ECB.

It is especially of note that into Tuesday’s June T-note future expiration the September T-note future traded at no better than the lead contract 124-08/-16 resistance, yet is now right back up around its highs. Any success in violating that 124-08/-16 resistance now that it is lead contract would point to the same sort of strength that the June contract exhibited above that level: a test of the upper-125 to low-126 lead contract resistance.  And the same goes for the other long-dated government bond September futures, as the Bund has held the 126.00-125.77 area on the early week pullback and is already up near the next significant resistance in the 127.12-.37 area. Similarly, the heavily discounted (to the June contract pricing) September Gilt future has ratcheted up into the important 122.30-.50 resistance. Much above that a push to at least the 123.50 resistance is likely in order.

That also leaves the US dollar and commodities significantly influenced by the equities decision to return to immediate weakness. Of late the US dollar has exhibited its classical counterpoint tendency to the equities and firmed up when equities are under pressure. That becomes more important now with the US Dollar Index having rallied back up around its critical .7580 resistance, and the EUR/USD seemingly headed back down toward its 1.4100-1.4000 support after not sustaining activity above its interim 1.4250-1.4300 area. That said, it is important to keep in mind that the full Tolerance of that EUR/USD support is not until the 1.3900 area.  Also important to keep in mind that EUR/USD is not really out to the upside again unless it pushes through 1.4500-1.4600.

The ‘risk-off’ trade seems also be impacting commodities and even the Gold market. Note the degree to which the August Crude Oil failed from no better than a retest of the important 95.50-94.50 support, and has now gapped below next congestion in the 92.00 area. This conforms to our expectation that it was likely to retest the 87.00 area or even the last lead contract 83.85 low prior to the extended rally kicking in from back in February. The economic outlook in so weak now that even the Gold that can assume a ‘crisis’ potential bid during any sharp weakness of the equities is also under pressure. The August contract failed just yesterday from the top end of the 1,550-1,560 range, and it is already back down trading in the still important 1,530-1,520 area. In fact, that area is more critical than previous due to the evolution of the up trendline in the contract and weekly MA-13.

Thanks for your interest.

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