Home > Uncategorized > 2012/07/05: Perspective prep still necessary awaiting ECB’s Draghi

2012/07/05: Perspective prep still necessary awaiting ECB’s Draghi

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

The Weekly Report & Event Calendar and Summary Perspective in the sidebar are still very relevant this week, because as we noted at the top of the week it’s all about Thursday and Friday. US Employment and other important economic data will be the coda to whatever transpires today. Yet today sees such an incredible combination of factors related to the success or failure of last week’s European Summit triumphal ‘agreement’ that it just cannot be ignored as the potential turning point for the market trend this week.

We will have much more to say on that below, yet for now will take the unusual step of moving right to the market comment prior to the balance of the background on Europe.


Not just as it applies to equities, but for other asset classes as well it is going to be very interesting to see if the September S&P 500 future manages to maintain its push above 1,350-55 from the end of last week. And while there are quite a few other influences that have sprung into the mix today, that likely has quite a bit to do with whether Europe follows through on its Summit agreement from last week. While September S&P 500 future still has some interesting interim resistances along the way, maintaining its overall bid above the 1,350-55 area should lead to a retest of at least 1,395 resistance and possibly even a retest of the 1,405-11 highs from back in April and May.

The other asset classes that are likely to be affected by this decision are obviously the primary government bond markets that have sagged in the face of general equities strength, and foreign exchange. However, the implications for the latter are still a bit less than clear, as commodity currencies have benefited more than the euro. Which seems a bit odd in light of the equities strength being based in some goodly measure on Europe solving its problems. Might that be an indication that the equities are not to be trusted until we get through today’s ECB press conference? We shall see.

That said those other indications include the Australian dollar now strengthening modestly above its 1.0250 resistance, strong sister September T-note future amongst the govvies still having problems escaping its 134-00 resistance, and yet weaker sister September Bund future held low-end support at 140.00-139.60 very nicely during a crunch last Friday. It is now back above 141.00 (reinstated support) even if still short of the 142.83 Tolerance and its 143.60 major topping line UP Acceleration key resistances. The equity bulls would also like to think that the renewed strength in Crude Oil and Gold are signs of a renewed overall ‘risk on’ mentality. However, at least for now those have also been exacerbated by the unsettled situation in the Persian Gulf on the back of Iranian threats.

All of that said, even the importance of the US Employment situation notwithstanding, much is going to be dependent on whether Europe maintains the confidence that it has finally achieved the solutions to its sovereign debt and banking issues. And on that we still seem a long way off from both the mentality and mechanisms necessary to maintain market confidence. Which is why the ECB press conference today is so pivotal once again. Lest anyone forgets, it was the optimistic expectations into the early May ECB meeting that were disappointed that led to the most recent sharp selloff.

And the degree to which disappointment with central bank comments and commitments can be a problem was illustrated once again in the wake of the FOMC meeting two weeks ago. We have a bit of the opposite situation today, at least so far. The Bank of England expanded its Asset Purchase Programme by £50 billion to £375 billion, even if that was in good measure justified by a very downbeat statement accompanying keeping rates steady at 0.50%. And the economic and equity bulls now have the additional benefit of another surprise 25 basis point Deposit Rate cut by the People’s Bank of China to 3.00%.

So it all appears to be fairly constructive. Yet the primary position of Europe in all this cannot be doubted. The ECB taking its own step today and finally cutting its base rate 25 basis points to 0.75% is only a much-belated acknowledgment of reality. What that does to bolster general global economic optimism is surely problematic at best. As far as a sense of corporate earnings health, 20% of US earnings come from Europe; and it is also the demand driver for 4.6% of Chinese exports. And in spite of the recent Chinese drive for more of a domestic demand economy (also a bit of a transitional drag), exports still play a major role in its sense of economic health.

And in that way, it all comes back to Europe. And there are quite a few factors there that combine to create less confidence than last Friday’s triumphant announcement might indicate. In the first instance, there is always the degree to which European policymakers tend to present conceptual breakthroughs as practical solutions. In this case approval from entities such as the German body politic and its constitutional court on steps like the direct European Stability Mechanism investment in the weak sisters’ banks are not necessarily assured.

There is also the issue of the time it will take to reach agreement among the Eurozone members on that pan-European banking oversight authority. That calls for ceding the sort of sovereignty which many members have balked at in the end. Not to knock the degree to which that is progress. Yet, the question remains over exactly what will be delivered on a practical level timely enough to make a difference to (for example) the rescue of the weaker Spanish banks.

There was an excellent Financial Times’ Long View column last weekend by John Authers on the likelihood this is a temporary hiatus in the European Sovereign Debt Crisis once again, and that Spanish and Italian bond markets are likely to be sorely tested once the ‘honeymoon’ period for the recent bout of European bonhomie wears off. And in our view that is another factor of why the later part of this week is so critical. There is classically about a 3-5 day grace period after each of these European agreements where they are allowed some time to demonstrate further progress.

After that, it is the natural skepticism and sometimes reversion to overt intra-European dissension that bothers the equities and global economic confidence once again. So along with the importance of tomorrow’s US Employment and other global economic data, it all begins once again with what ECB President Draghi has to say at the press conference in a little while.

And even beyond what comes out of that there is one more troubling question hanging over the recent European agreement: is Europe embarking on a more major reflation policy really going to address the core solvency issue? Or does it just raise the spectre of what will be global reflation efforts diminishing confidence in the (until now) strong primary government bond markets? How exactly does say major Euro-zone reflation effort encourage purchases (and thereby reduced yields) for Spanish, Italian and other peripheral Euro-zone bonds?

Thanks for your interest.


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