Home > Uncategorized > 2012/04/11: Quick Post: Much as expected on central bank liquidity

2012/04/11: Quick Post: Much as expected on central bank liquidity

© 2012 ROHR International, Inc. All International rights reserved.

Short & Sweet on the specific market comments in this post. That’s because we are mostly revisiting the key factors noted in Monday’s post on why the equities are NOT likely turning into a sharp directional reversal of the early year up trend. As noted at that time, there will more likely be further filling out in a more convincing top between the mid-1,300 and low-1,400 areas than any further sharp capitulation.

In the first instance, without a new trading high of any substance in the June S&P 500 future last week (i.e. only marginally above the previous week’s 1,415.50), there is not even a bona fide pattern top in place. Across time the equities might still be topping out. Yet, the seasonal phase and significant support below the market indicate any major trend reversal will most likely occur on a ‘trading’ basis. There will more likely be some further filling out in a more convincing top between the mid-1,300 and low-1,400 areas than any further sharp capitulation.

And there are a couple of wild cards out there, one of which has already been confirmed as the likely market reality. In spite of Signore Draghi’s less accommodative tone at last week’s post-rate decision press conference, it has already signaled this morning that the ECB stands ready to intervene in the Spanish government bond market.

The European Sovereign Debt Crisis raising its ugly head once again was one of the wild cards, with the ECB and European bailout funds commitment to mitigating it once again a key factor. The other was the potential for a violent resolution of the Middle East standoff with Iran. However, as noted at the top of the week, neither of those would seem the sort of influence that would totally crush the equities in the near term. And on current form it appears our expectations were at least half right.

The equities have already been through a series of Euro-zone scares, and seem to weather them well once political leaders, finance ministers and central bankers focus on stemming the crisis. Even though Spain is a bigger problem that Greece, there were steps that could be taken if push comes to shove. And that is in spite of both the Fed and ECB sounding a bit less accommodative last week, European Central Bank Executive Board member Benoit Coeure triggered speculation that the ECB will revive its bond-purchase program to lower Spain’s borrowing costs.

One must wonder if this is indeed essential to the transmission of monetary policy that is the required protocol for the ECB buying distressed sovereign debt. That said, Monsieur Coeure noting (according to Bloomberg) that Spanish “market conditions are not justified would seem to be just that sort of assertion. And Coeure is in a position to do something about it. He heads the ECB’s market operations division.

So at least for now markets have shrugged off the idea that Spain’s dual drive for austerity and growth is a contradictory position. In that regard it is much the same as the quandary that plagued Greece. With Spanish GDP expected to shrink 1.7% this year it is hard to see how it will hit its fiscal targets. Much as was the case with Greece, the question will be whether lower government spending into a 23% unemployment rate can really create enough tax revenue to repair its fiscal balance?

We shall see. But in the meantime the ECB bond market intervention did nothing more than delay the need for a Greek bailout. The difference is that the €700 billion committed to the combined European Financial Stability Facility and European Stability Mechanism funding is seen is not nearly enough to address a liquidity problem in Spain’s much larger economy.

It will need to be stretched a very creative manner to even begin to cover the funding needs for such an operation. Which is not to say that might not be possible. But it will call for a far greater degree of legerdemain than anything the ECB might have previously attempted.

Of course, any sense that will be necessary in Europe will also reinforce the degree to which a ‘Bernanke Put’ is still likely in place in the US in spite of the less accommodative minutes from the last FOMC meeting. That’s a given. And it may well offset any week indications in this afternoon’s Federal Reserve Beige Book release. If the Europeans are prepared to engage in extreme liquidity provision measures to prevent the debacle, who really believes Mr. Bernanke would not provide extensive further liquidity if the US economy and equities should falter?

General Market Observations

In spite of the June S&P 500 future dropping below the higher 1,375-67 support yesterday on European concerns, it held the more prominent congestion from last summer that begins in the 1,355-50 range. In fact, the Tolerance of that support is the 1,338.80 lead contract early March pullback low from just before it pushed above 1,367. As such, even the sharp weekly gap lower on Monday (from last week’s 1390.20 Close) cannot be considered a bona fide resistance above the market. It occurred due to the release of the US Employment report on a day when futures trading was closed for the Good Friday holiday. As such, that particular gap must be ignored. That said, the interim resistance in the low-1,400 area is now more formidable than previous. It is reinforced by the recent failures in that area.


And the response in the other asset classes is most interesting. That is most prominent in the extreme strength of primary government bond markets that were pronounced Dead-On-Arrival (i.e. in renewed bear markets) after their sharp drop four weeks ago. However, the push back above some key resistances such as June T-note 129-20/130-00 has put them back in a more bullish mode. It is already above its interim 131-00 resistance. That would seem to point to an ability to retest the all-time high at 132-10 from back in February if equities should weaken for a more vigorous test of lower support.

And the upside leader is the June Bund future once again; no surprise in light of the weaker Euro-zone economy and flight from some of the peripheral sisters that appear suspect once again. It has already been up around the lead contract 140.52 all-time high. Weekly oscillator indications and topping lines project a potential to see the 143.00 area should it escape that previous high by any degree (i.e. Close above 141.00.) Even the much more troubled June Gilt future has pushed back above its 114.50-115.00 resistance (now reinstated support), with next significant resistance not until the 117.00 area.

All of that volatility might seem strange to some. After the false DOWN signal on the primary government bond markets’ gap lower and short-term implosion a month ago, it might have seemed bond markets would remain more bearish. However, equities weakness and the unsettled global political and financial situation reversing that are reasonable drivers for a renewed “haven” bid in the govvies.

On the whole foreign exchange remains a quite a bit more subdued, churning affair. Even weak sisters like the Australian dollar are only progressing in an orderly fashion in their slide. AUD/USD back below 1.0400-1.0335 has held to top of its 1.0258-1.0184 next support for the past several sessions. Similarly the recent reversion to strength in the Japanese yen has only seen USD/JPY slip below its 82.00 support to the 81.00-80.50 area.

The one interesting exception is the April Gold future, which was previously headed down with equities. That was ostensibly on a loss of ‘inflation premium’ which had assisted bouts of strength in the yellow metal in March. However, after getting slammed on equities weakness last Wednesday, it rebounded from major 1,615-00 support (Fibonacci, December’s Negated DOWN Break, hefty congestion and gaps) on Thursday even as equities weakened further.

As we inquired on Friday, might this mean it could regain a ‘crisis’ haven bid because of the weakness of equities instead of dropping once again in line with them? On current form that would seem to be the case. It has pushed up once again above its interim 1,650 congestion (which is actually more of a flip-flop area between the more major 1,600 and 1,700 areas.)

As we suggested previous, the situation in Europe will likely be a key component of that answer. And the renewed ECB commitment to provide liquidity to troubled sovereign debt markets only reinforces our instincts on that. The degree to which the solution for any equities weakness is further central bank largesse will likely only reinforce a renewed ‘haven’ bid in the yellow metal.

Thanks for your interest.

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