The Week Ahead

Last week we saw thin markets (due to the US 4th of July holiday Wednesday) starting to retrace or discount the disappointment that has followed last weekend's EU summit. As usual, the summit promised more than it (at this point) can deliver and the markets started to realize that as several Northern EU countries (almost entirely based on the North/South divide with the Northern countries having the most influence and the Southern countries in the most economic trouble) started putting out the word that they are not agreeable to the Summit's conclusion which the market favored. Probably the biggest disappointment were the numerous comments from Northern EU countries, which in essence tore apart the optimistic tone the EU summit had set, specifically with regard to bailout conditions being loosened for countries like Spain and their banking bailout and perhaps more importantly the issue that had plagued debt yields in the PIIGS countries (especially Spain and Italy) regarding the ESM bailout mechanism's debt repayment seniority. When the first EU Finance Minister's meeting of several weeks ago decided on a $100 bn euro bailout for the Spanish banking sector, the hopeful optimism was short lived when the market quickly realized that sovereign bond/debt holder's right to payment would be subordinated by ESM loans to the same countries.


The EU summit of last weekend sought to address the issue which had sent Spanish 10-year bond yields over the critical 7% level (as they sold off on the ESM subordination reality), specifically the summit called for the ESM's seniority status to be repealed, a complicated issue that may require an entire re-work of the ESM (EU's permanent bailout fund-still not operational as Germany still has not ratified the ESM) which would lead to many individual countries to have to go through the process of voting and ratifying the new ESM (stripping the ESM's debt seniority in an effort to try to assure bond traders and get sovereign debt yields which are in unsustainable territory back down to more sustainable levels). The issue may sound like a technicality, but in reality it could be the difference between Spain going from needing a banking sector bailout to a full-blown sovereign bailout as the unsustainable yields lock Spain out of the debt markets with Italy trailing not too far behind.


In any case, last week the various statements of those who hold the purse strings and real power to influence the ESM (mostly the Northern EU countries) quickly deflated the post E summit enthusiasm as once again, the EU announces grand plans without any seeming contact between the major power players before making such promises, only to find out after making such grand statements that there is little agreement; as such, last week we saw the post EU summit enthusiasm fade. For those of you who have been following the macro trends in such matters over the years, this is nothing new; think back to the agreement among EU member countries to leverage the EFSF (temporary bailout fund) to a trillion dollars, yet there were to details as to where the money wold come from and in fact the EFSF had an offering to raise a mere $3 billion euros which was a technical failure-how did they expect to get to a trillion when they couldn't even cover a $3 bn euro offering? This has been a hallmark of EU summits and Finance Minster meetings, announce grand plans with no details and then watch the enthusiasm crumble as reality takes hold.


Further deteriorating market sentiment last week was disappointment that Central bank decisions came in at consensus rather than a more optimistic view that more easing would be introduced.


In a sign of the times, the 26 EU countries that are supposed to have free and open borders , are now introducing border controls. It seems apparent that countries are concerned about flight of capital from weaker countries to more safe haven countries, an extension of the bank run theme exacerbating problems for those countries already in deep economic trouble as well as citizens from weaker countries with high unemployment seeking work in some of their stronger neighbor countries-so much for the  Schengen and Amsterdam treaties.


We also found out last week that as a result of the ECB cutting its deposit rate to 0%, JP Morgan, Goldman Sachs and BlackRock have either restricted or closed new subscriptions to EU Money Market funds, it's obvious that new and existing investors face losses with the ECB's deposit rate at 0%, seemingly a move to encourage EU banks which have been hoarding cash within the ECB's deposit facility as a flight to safety; the banks (many which took ECB LTRO money at 1% interest) were willing to take a loss to protect capital (1% interest paid on 3 year ECB loans which were deposited in the ECB at a record setting all time highs to earn .25% interest-realizing a -0.75% a year loss). The rate cut seems to be a tool (however weak) that the ECB is using to try to get money flowing through the EU economies as the EU financial system has become increasingly frozen. The ECB's own SMP bond buying program (in the secondary markets) has been shut down for nearly 4 months, it seems obvious the ECB is hoping some of this deposited money will move in to the EU economy, however a more disturbing question is the lack of any ECB SMP movement, how bad is the ECB's balance sheet?


Of course the US as well as many other nations across the world and in Europe saw quite a bit of bad news on the manufacturing and services front. Last year we discussed the myth of US decoupling from the world and EU economies as the US started the year with rather good economic data. As was pointed out at the time, the early year seasonal adjustments were the reason for the better US data as many seasonal adjustment were purely arbitrary, once we moved out of the seasonal adjustment period, the true tone of US macro-economic data was revealed and was much worse than earlier data (manipulated by seasonal adjustments) suggested. It seems we can now put the US "De-coupling" myth to rest as the negative surprise index for the US has joined the European negative surprises-note the change in early 2012.

Once the US moved out of the seasonal adjustment period, the negative surprises increased dramatically. For anyone who dug in to the early data and the sub-indices within the data, the truth was there all along.


As for this weekend, other than some stories about banks and the Libor mess, the EU has been rather quiet with no summits or Eco-Fin meetings. As such, ES's open today has been rather uneventful.


We did see some news out of Saudi Arabia in which government authorities used live ammunition during a Shiite protest in Qatif in which a senior Shiite opposition leader was shot and arrested, leading to several casualties. This is the same region that was the source of tension in the Kingdom during the MENA revolution that started in Tunisia, followed by Egypt, Libya, Syria, etc. Crude futures are slightly higher than Friday's close, not by much, but off the opening trade of the week by nearly +1% as of right now.


ES is relatively flat, the EUR/USD is slightly higher than Friday's close, but not by much.

 ES trade from Friday and the opening indications for this week (light blue background to the right)

 A closer look at ES tonight, relatively flat and uneventful, of course the 3 a.m. EDT EU open may change that.

 The EUR/USD open last week at the red arrow and the open this week at the green arrow.

 On a 60 min chart you can see what I talked about last week, the normal risk on correlation in which the Euro and the SPX typically move together was broken suggesting little support for continued market upside in the very near term without a pullback.

The EUR/USD open this week at the green arrow.


As for the different trends and expectations from 3C charts as of Friday...

 The 30 minute SPY chart shows a decent negative divergence, suggesting a decent pullback.

 Friday we saw some intraday positive divergences develop on this 5 min chart and later in the day price reacted by moving up in to the close. It seems to me by the chart that the most likely short term path (perhaps Monday or intraday Monday) is a little backing and filling up in to Friday's gap.

Friday's late day positive intraday divergences and eventual relative closing strength seems to be based largely or entirely on the WSJ's Jon Hilsenrath's comments that essentially said the weak jobs data increases the likelihood of F_E_D easing later in the year, BUT doesn't guarantee it. Although Hilsenrath is considered by many to be the F_E_D's unofficial rumor leaker, the actual statement is nothing new at all. It has been pointed out MANY times here that weak data is looked at favorably by those looking for F_E_D easing or QE, gold itself has been a barometer of this sentiment for some time as it is would be one of the biggest beneficiaries of further dollar debasement. In other words, Hilsenrath's comments were nothing new and certainly far from anything definitive with the "But" caveat. It's actually kind of silly that the market would move on this news from the WSJ, but seems to explain our intraday positive divergence and subsequent move off the lows of the day.


 I question whether the positive divergence that seems to have been formed on insider knowledge of the Hilsenrath comments, will hold through Monday, the 5 min chart does look like it has more upside in and of itself.

 The longer term 4 hour chart at this point, still indicates there should be more eventual upside before we see a primary downtrend seriously re-emerge. The market this week was in short squeeze territory and we did see a few intraday short squeeze moves, however based on all of the analysis (including FX and our risk asset layout), I doubt very much we see a short squeeze without a fairly significant pullback first.

The long term primary 3C trend is quite ugly and it looks like the most likely path ultimately will be a resumption of the primary downtrend that just barely started from the March highs.


As I noted Friday, on a 4 month or so basis, the market has done pretty much nothing, it has been very volatile and choppy which has made long term trades difficult and short term, nimble trading quite effective, although some leverage such as options is necessary to make the moves worthwhile.


As far as a game plan, much will depend on your own trading style, risk appetite, ability to watch the market, etc. If we see some short term strength Monday, that could be use to set up some quick short trades for a downside move or pullback. Should we see positive divergences as I expect we will eventually see in to a pullback, that should offer opportunities to buy some long positions on the cheap for a final move higher and a true short squeeze, should we get this true short squeeze, it could be quite profitable with a sharp move to the upside. Ultimately we'd want to be looking at the end of a move like that to establish or add to core short positions for the resumption of the bearish primary trend which is where we'd likely see the best chance for longer term trending trades.


Of course this is what the market looks like right now and we want to listen to the message the market is sending in underlying trade (3C charts, risk asset layout, macro fundamental data, etc.)


As for some key events this week from GS:

Monday July 9

• China CPI (June): China CPI was 3.0%yoy in May. Consensus expects 2.3%
• Draghi Speech at the European Parliament in Brussels
• BOE Tucker Testimony to Commons
• Eurogroup/Ecofin Meeting

Tuesday July 10

• UK Industrial Production (May): Consensus at -2.1%yoy for May, down from -1.0%yoy for April.
• Weidmann Speech in German Constitutional Court

Wednesday July 11

• Japan Monetary Policy Meeting: Consensus expect no further easing steps from the MPC at this meeting.
• Germany CPI (June): Consensus expects 1.7%yoy in June, unchanged from the print in May.
• Brazil Monetary Policy Meeting: Consensus expects the SELIC to be cut by 50bps from 8.50% to 8.00%
• United States Trade Balance (May): Consensus expects -$48.4bn in May, down from -$50.1%bn in April.
• United States F_O_M_C Minutes

Thursday July 12

• South Korea Central Bank Meeting: Consensus expects the base rate to remain unchanged at 3.25%.
• Indonesia Central Bank Meeting: The policy rate was at 5.75% in June. Consensus expects no change in the July Meeting.
• Chile Central Bank Meeting: Consensus expects the base rate to remain unchanged at 5.00%
• Euro-area IP (May): Consensus expects 0.0%mom up from -1.1%mom in April.
• ECB Monthly Bulletin

Friday July 13

• China Real GDP (2Q): Consensus 7.7%yoy down from 8.1%yoy in the first quarter.
• China IP (June): Consensus expects IP to be 9.8%yoy in June up from 9.6%yoy in May. 
• Russia Central Bank Meeting: Consensus expects no change in the overnight auction based repo rate at 5.25%.
• US PPI (June): Consensus estimates of -0.6%mom, up from -1.0%mom in May.

From Bloomberg, the US Calendar for this week...

Click for a larger view or you can find it at this link


Summarizing: I expect the main theme for the week to be a pullback/price weakness, although we may see some filling of Friday's gap early in the week. It jut seems the EUR/USD is too disconnected with the market, 3C seems to agree. We'll be watching for any changes and opportunities as always.


Have a great week ahead.