Home > Uncategorized > 2012/05/03: Weak data, France headed for Socialism, ECB against stimulus…

2012/05/03: Weak data, France headed for Socialism, ECB against stimulus…

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

It seems the fundamental drivers for the markets are possibly headed for another significant disconnect. Yet the markets are ignoring it for now. Possibly that is because whether there is a dislocation in Europe will not be completely clear until after Sunday’s French Presidential election and Greek Parliamentary elections. However, that does not lessen the degree to which the mindset of the European people (and some European governments), the economic data, and the current stance of the European Central Bank might be at odds.

This has become more apparent through the French Presidential debate allowing Monsieur Hollande to maintain his lead over President Sarkozy. It is of course still possible that the current French head of state will attract enough votes from the Far Right to defeat the challenger in Sunday’s poll. Yet, we must admit that the prospect of the Socialist victory in the presidential election is creating far less concern in the markets than we might’ve suspected from yesterday’s Showdown at French Election Corral.

The consistent weakness of the international economic data (now including US ISM Non-Manufacturing Index) is making Tuesday’s strong US ISM Manufacturing Index ever more the outlier in a weakening global economy (as we had already noted yesterday.) While there might be a surprise in tomorrow morning’s (holiday delayed) European Services Purchasing Managers’ Indices, any further confirmation of weakness there will set a very negative tone into the important US Employment report.

That is already somewhat suspect due to the weakness of yesterday’s ADP private employment figure and this morning’s Challenger Job Cuts pushing up once again. Whatever else we may see, the prospect of further weakness in economic data would seem to justify the “growth” versus austerity agenda of those on the Left. And yet, at today’s post-rate decision press conference ECB President Draghi seemed far more focused on reform rather than any further stimulus. And that is just the sort of thing that might leave the central bank on the opposite side of popular rejection of austerity…

…and he was very explicit on a couple of key points regarding the preference for reform over stimulus, and the lack of any need for further bank liquidity operations. When questioned on whether the Long Term Refinancing Operation (LTRO) bank loans were losing their impact, he noted the positive effects were always going to take some time. And at present credit conditions are easing (along with the lowering of the repo rate), the banks in the most distressed companies are seeing their deposit base rising once again, and the lending activities were therefore returning more so toward normal as well. As such, no further LTRO activity can be expected anytime soon.

That is consistent with an aside he bothered to deliver on his expectation that the Euro-zone would see a gradual recovery in the second half of this year. And to further stick his neck in the future expectations noose, he shared his anticipation that 10 of 17 Euro-zone countries would be out of their excessive debt position at the end of 2012; and another four would join those ranks by the end of 2013. Quite an expectation.

And yet, it is consistent with another cherished European Monetary Union (EMU) goal that he also bothered to revisit: the culmination of the Euro Project in full fiscal union! And as if anyone needed reminding, he articulated the fact that would mean budget controls moving from the national governments to a centralized European budgeting authority. Quite a statement at a time when some are asking whether the weak sisters will even remain in the EMU. What could the purpose be in visiting that point at this time?

Quite simply, pushing on the other major point in the ECB’s agenda: the need for continued aggressive reform versus classical stimulus. And that is exactly what might put him and the ECB at loggerheads with the electoral shift to the Left in Europe. As most folks are aware of Monsieur Holland’s agenda (shorter work week, early retirement, maintaining all current social benefits, little if any reform of labor practices, etc.), it is more to the point to review what the ECB president had to say today.

He went into a lengthy explanation of why near-term stimulus is not a benefit, even if growth is desirable. He was adamant that the latter could be encouraged by structural reform. He reminded everyone of the “Stagflation” of the 1970s into the 1980s, and that this was a direct result of higher taxes and lower capital spending as emergency measures in the face of the economic contraction of that era.

And yet those higher taxes did not encourage the sort of growth necessary to rebalance the economies and fiscal position of the governments. He later reiterated that idea in response to a subsequent question. While expressing his appreciation of why governments surprised by the sharpness of the economic contraction would enact emergency tax hikes and capital spending decreases, he was adamant that they must reverse these as quickly as possible.

And one of the most major aspects of the reforms he was suggesting is those affecting labor markets. In response to a specific question on Spanish youth on employment, he noted that was directly fomented by an unbalanced labor policy. Enticements to hire more youth during a boom time were based upon less burdensome requirements for their termination that protected established workers over the interests of the young.

Of course, that is consistent with the degree to which further classical stimulus will only tend to benefit those in work already, and not those who have been disenfranchised by misguided labor policies. The restated his (and many other free market advocates’) position that the key to effective labor markets is equity and flexibility.

On a couple of other key points he also reinforced previous ECB positions. There had been no intervention in the Spanish bond market in spite of higher yields because as of yet it had not represented a threat to “transmission of monetary policy.” Of course, that is the classic canon of the European treaties that allow ECB to support sovereign debt markets when conditions become too disorderly. While that may sound less than supportive, it provides the latitude to move if necessary.

The most interestingly also noted that he was not too concerned about the lapsing of the European Financial Stability Facility (EFSF) mandate. While it is well known both he and previous ECB head John Claude Trichet were appalled and frustrated that the EFSF was never properly structured or funded, it was striking for him to say so in so many words.

To wit, “EFSF was not a success because it was created in a way that it could hardly function.” He expects better performance from the European Stability Mechanism (ESM), because they had learned a lot of lessons from EFSF. Hopefully he is right, even if the current funding holds no potential to paper over problems in Italy or Spain. And as we and many others had noted, that EFSF failure was in large measure due to the lack of timely operational agreement and funding.

All the same, it was quite a statement from the central banker about a key market rescue facility. And yet, as much as his candor was impressive on that front, on another he demurred for obvious reasons. He refused to comment on the effect of any shift to the Left might have in the French and Greek elections this Sunday. He claims he “could not know.”

This would seem a clear case of that actually meaning, “I’d rather not say.” And on a certain level even posing the question was pretty silly, because there was no benefit to him providing what is likely the real answer. And in the real world too much reversion from austerity to stimulus will still impose austerity; only it will be through the very unwieldy mechanism of a likely major spike in the long term bond yields of those countries which jettison fiscal rebalancing efforts.

And for all of the friendly talk in negotiations which may follow a Socialist victory in France and shift to the Left in Greece this weekend, those will likely put the ECB at loggerheads with the new governments. There will no doubt be a call for more extensive ECB intervention in bond markets that weaken in the wake less aggressive fiscal rebalancing commitments and (in the case of France) far less than necessary labor market reforms. Yet both by treaty and preference of the more frugal northern European funders of the bailout efforts, that is not likely to occur.

All of which will leave the situation in a far more disorderly state once again if indeed the Left manages to triumph to any significant degree this weekend. That should not be taken as a partisan statement. It is more so a candid macro-technical assessment of the realpolitik of different paths to “growth”: deficit spending versus fiscal and labor market reform. We shall see.

 General Market Observations

On balance, it is all going to have a lot to do with whether the June S&P 500 future maintains its short term strength after recent multiple tests of support (violated resistance) in the 1,390 area, and whether the June Bund future can sustain its ‘jailbreak’ above the low 141.00 area. If the latter is so, the technical implication is for it to gain another couple of points on the upside. It all makes for a most interesting macro-technical trend evolution. Can the “good” (or at least somewhat better) US surmount the serial indications of economic weakness and peripheral sovereign debt problems presented by Europe?


The bottom line on divergent trends between Europe and the US shows up in the weak sister DAX managing to bounce from key supports in the low 6,600 and 6,500 areas. However, it has had no success pushing above next incremental resistance at 6,860. The major divergence continues.

Government Bonds

And that is also apparent in weak sister June Gilt future stalling well short of its 117.00 area resistance after holding 115.00-114.50 support; possibly a subset of the significantly better performance of FTSE against the DAX. That would also go a long way toward explaining strong sister June Bund future pushing more convincingly above 141.00-.30 area oscillator and topping line resistance. Any convincing escape indicates a potential to reach the 143.00-.50 area. While that might be a bit problematic if equities strengthen, any weakness in equities will underpin that sort of upside extension in the Bund.

June T-note future continues to be stuck in the middle: it remains within striking distance of its mid 132-00 resistance after holding as well as the June Bund future on recent selloffs (not even reaching key 131-00 short term gap higher support.) Much above the 132-16/-20 area it might be able to surge to 134-00 (its next major oscillator threshold.) However, here as well, any significant extension likely requires an equities capitulation.

Foreign Exchange

This appears to be more of a churn than anything else, yet with the British pound as the highlight strong sister (and other than on a purely technical trend basis, that’s quite a shocker.) That said, it still appears the real potential is possibly for a much weaker Japanese yen overall. Even if it has strengthened of late, the overall pattern is obviously no longer ‘Carry Trade’ related. Note recent firmness on US equities resilience. Macro-technical view suggests a USD/JPY test of 79.50-78.50 technical support. If it holds, upside Objectives are significant: interim 95.00, yet with 110.00 or even 125.00 possible. Of course, that presumes USD/JPY can first surmount the 82.00 and mid-84.00 near-term resistances.

Energy & Gold

June Crude Oil also remains a churning market finally pushing modestly above its previous range between 105.00 and 101.50, only to capitulate back below it on further signs of weakness in the equities. In fact, it looks that much worse for having pushed up above 105.00; the slippage back below there represents a real technical weakness. It is now back below the weekly MA-nine and MA-13 in the mid-104.00 area, and any sustained slippage will turn the daily MACD back DOWN (joining weekly MACD that has already been negative for the past several weeks in spite of the recent bounce.) Whether or not that weakness will extend to threatening the 101.50 support once again is likely at least partly dependent on what the June S&P 500 future decides to do with the 1,390 area after the US Employment report tomorrow.

And while the June Gold future is churning as well, it still appears rather constructive after holding its latest test near (if not really quite down into) the major 1,615-1,600 support. Of note on its recent trading, there was a down channel UP break at 1,642; which is also the daily Close it gapped higher from last Thursday morning. Interesting that it is now back below it. That may open the door to another test of the low-1,600 support on modest further equities weakness. However, if it should test that lower support once again it should be watched carefully for any sign that European disruption assisted in holding in at getting the bid back. We shall see.

You can also check out the still relevant technical projections just below the calendar in the right-hand column.

Thanks for your interest.

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