Some Technical Thoughts

Euro:   It has not closed above its 20-day moving average since late October.  It comes in now $1.3120 and falling around 20 ticks a day.  Ahead of there resistance is likely to be encountered in the $1.3000-50 area.  The 50 day moving average crossed below the 200 day (golden cross) in early October.    Volatility has trended lower most of the month, but the 3-month formed a base near 14%.   It seems that a weaker euro is consistent with a decline in volatility.  Note that the risk-reversals have seen the premium for puts over calls narrows considerably in recent weeks as the euro has fallen.   The premium for puts is about 2.59% now and in mid-Nov hit a record 4.39%.  One way to make sense of this is that the short-term market is short euros and bought some calls for insurance.  A convincing break of $1.2850 area will bring the next target $1.2580-$1.2650 into view. 

Dollar Finishing Year Mixed, Second Annual Gain Against Euro

The US dollar is narrowly mixed as activity winds down. The main price action to note is that the euro fell through the JPY100 level for the first time since mid-2001. For the most part, the dollar is confined to yesterday's ranges against the major currencies.

Emerging market currencies are finishing the year in mixed fashion as well. Intervention by Turkey is helping the lira recover from record lows. The South African rand, which has been the strongest emerging market currency over the past couple of weeks is shining today, gaining almost 1% against the greenback. On the other hand, intervention by Poland yesterday and possibly today appears to have been shrugged off and the zloty is the weakest of the emerging markets currencies today. More generally, the eastern and central European currencies are the weakest today.

Euro Slump Extended, Mediocre Italian Bond Auction, Poor Hungarian Debt Sale

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Bull Fax

The US dollar is modestly firmer against the major currencies, but is more mixed against the leading emerging market currencies. The euro extended yesterday's losses in Asia, falling to $1.2866, the lowest level since the start of the year. The euro's losses against the yen were also extended with new 10-year lows recorded just above JPY100.30.

Global equity markets are mixed, after the S&P 500 snapped a 5-session advancing streak yesterday. Modest gains in China and Taiwan. Korea's Kospi eked out minor gain despite disappointing Nov industrial output declined 0.4% compared with the consensus estimate of 0.6% gain, though the Nov current account hit a new record of almost $5 bln. As widely anticipated, Taiwan left rates steady at 1.875%. European bourses are narrowly mixed. Basic materials and commodities are the strongest sectors, while financials and telecoms are the laggards.

Great Graphic: Global Debt Clock from The Economist

There are some pretty great interactive clocks out there. (For example this one from Deutsche Bank shows metric tons of greenhouse gas in the atmosphere.) Check out the interactive Global Debt Clock from the Economist.

Italy Raises Funds, Market Still MIA

A favorable reception to Italy's debt sales failed to breathe fresh life into the moribund foreign exchange market.  The euro continues to trade in last Thursday's range of $1.3017-$1.3119.  It continues to trade within the range seen on Monday, when much of the world was still on Christmas break, and it was confined to $1.3035-$1.3083.   

The yen is trading higher for the fourth consecutive session.  Today the dollar traded at its lowest level against the yen since Dec 16th.  Some observers will link today's yen gains to the fact that the US Treasury's report was critical of Japan's recent intervention.  Yet the fact that the US did not participate in the intervention already had already signaled the market that the US did not support the intervention.  The US did participate in the intervention in the immediate aftermath of the earthquake. 

Japan and China: Small Beer

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Business Insider

The main financial development over the Christmas holiday was an apparent agreement between Japan and China on a wide range of financial issues. The two key aspects are an effort to settle more of the bilateral trade in yen or yuan and that Japan will apply to buy Chinese bonds next year.

Japanese officials had already signaled interest in buying Chinese bonds. Contrary to what several press reports intimate, this is hardly an meant to diversify reserves. Recall Japan's reserve holdings at over $1 trillion are the second largest in the world behind China.

Happy Holidays from Marc to Market!

Well I'm Jewish, but my webmaster (and let's face it she is running the show here) thought I should put some holiday spirit on the site. So I give you Last Christmas by Wham! as the (clearly superior) Taylor Swift cover doesn't have a music video.

Consolidation in FX

A consolidative tone has emerged after yesterday's powerful reversals after the warm reception to the initiation of the ECB's 3-year funding facility. Although the argument advanced in this space is that banks will 1) use the funds as a liquidity cushion, 2) service own liabilities, and 3) to the limited extent they increase sovereign bond holdings, they largely stick to their own sovereign's.

Of course, the early January auctions, like the January 13 Italian and the January 29 Spanish bond offerings will be extra closely scrutinized. Overnight deposits at the ECB are elevated and will likely rise further. Stress in the financial system remains powerful as numerous measures show, like the 3-month currency swap rate and the Euribor-OIS spread.

More Thoughts on ECB's Liquidity Provisions

Many observers seem to be looking at the 523 banks that took 489.1 bln euros from the ECB's 3-year repo operation and recognize it to be on the upper end of expectations. Yet the situation is more complicated and the injection of new liquidity is not nearly as much.

Note that the ECB provided funds in three different facilities. 169 bln was taken in yesterday's 7-day operation and another almost 30 bln taken at the 3-month refi today. Combined with the 3-year operation, this is a provision of 688 bln euros.

Classic Buy Rumor Sell Fact after LTRO

The euro extended its rally to a six day high, just shy of $1.32 before the results of the ECB's allotment.  The results were at the upper end of expectations and the euro was returned to session  lows.  A classic buy the rumor of a strong demand and sell the fact.  Expectations seemed to have crept higher.    The larger short squeeze in the euro may not be over.   The key seems to be $1.3050 area.  It should now be support for this corrective advance to remain intact. 

Interview with Global Finance Magazine

Better late than never, check it out here.

ECB's Long-Term Repo Operation

The ECB will conduct its first 3-year repo operation tomorrow. Yet it is already having an influence on the capital markets. Some banks are thought to have been buying short-term Spanish and Italian bonds that will ostensibly be used for collateral, for example. In turn the generally good reception last week to the Spanish 5-year bond auction and the bill auctions this week have helped spur a bit of a short-covering bounce in the euro--with record net short speculative positions at the IMM.

With the gains scored in the North American session, the euro has retraced almost 38.2% of the decline since the Dec 8 high. That comes in near $1.3142, while today's high has been $1.3132. The euro's bounce helped drag up the other major and emerging market currencies. As we have noted the correlation between the euro and the US stock market is largely matched by many foreign currencies high correlation with the euro.

Euro Squeezed Higher, Takes Others With It, Positive Newstream

Successful Spanish and Greek bill auctions and better than expected German IFO caught the market wrong-footed, if the record net speculative short at the IMM is anything to go by.  The euro has shot up to almost $1.3090 and pulled up the other major currencies and emerging market currencies in its wake.    The greenback also surrendered nearly all the gains scored amid the uncertainty immediately following the death of North Korean leader Kim Jong Il. 

Riksbank Meets Tuesday, Market Risks Disappointment

In recent days the Swedish krona has been among the strongest of the major currencies. It continues to trade like a high beta euro in the sense that it seems to move in the same direction of the euro but more so. The recent low in the euro was in the middle of last week near $1.2950. The dollar's high against the krona, the highest since last December, was recorded the same day near SEK7.0250.

CNBC: Markets Seek Merriment

Europe's Three No's in Two Parts: Part II

European Bond

The ECB, as illustrated by the Fitch comments, is seen to be the key protagonist and the pressure is more acute on it to act.  Yet it steadfastly refuses, though since the resumption of its bond purchase program, it has acquired almost the same amount of bonds as Spain and Italy have sold in the primary market.

Europe's Three No's in Two Parts: Part I

The European debt crisis is the single most important driver of the global capital markets and will continue to be so well into next year.  While observers have their favorite proposals how the crisis can be addressed and closure finally brought to the crisis, which is extending into its third year, most do not seem politically realistic.

Dollar Softer, Likely Temporary

Contrary to much speculation in the markets yesterday, France's sovereign credit worthiness has not been downgraded. Euro zone flash PMIs were slightly better than expected (though still below 50) and Spain raised much more money in its bond sales ( 6 bln euros vs 2.5-3.5 bln).  This helped spark a largely short-covering led euro bounce and has extended to the other major and emerging market currencies as well. 

The Euro and the S&P 500: Correlation Update

(This follows up on posts here and here.) One of the characteristics of the investment climate that we have tracked over the course of the year is the tight relationship between the euro and the S&P 500. The following observations are based correlations conducted on percentage change of the euro and the S&P 500.

The 60-day rolling correlation between the euro and the S&P 500 steadily rose since early March when it was 0.17. The record, going back to the early 1990s, using a synthetic euro, was just recorded on Dec 2 at 0.85. The correlation has barely changed since then. 

Norway Surprises and Ongoing Funding Woes

Norges Bank cut its official deposit rate by 50 bp to 1.75%. Most were looking for a 25 bp move, but some local banks had been warning of a 50 bp. The central bank was clearly concerned about the knock-on effects from the euro zone, but also noted that market funding for Norwegian banks was less accessible.

The dollar funding pressure continues to be seen. Many observers thought last week's 3-month dollar auction that saw a bit more than $50 bln placed eased the demand. We argued to the contrary, the dollar demand is much greater and we expressed mild disappointment.

Flat Bounce Means Euro Downside Not Over

The euro barely managed to move above reaction high seen in New York yesterday near $1.3050.  There is widespread talk of large demand in front of $1.30 and the low thus far today is $1.3005.  Stops are thought to be below, so a break could see strong follow through, once though bids are absorbed. 

FOMC--Rare Non-Event

In an unusual but not unexpected fashion, the last FOMC meeting was as much of a non-event as such a gathering ever is. The FOMC left policy unchanged. This includes not only interest rates of course, but also its asset purchase program and its communication policy.

Misconceptions

Market participants, including economists and strategists are prone to confusing what they believe should be the case with what will be the case.

Paul Krugman's recent post recognizes this: "It's actually quite remarkable", the Nobel-prize winning economist wrote, "how many sensible people base their analysis on the presumption that the ECB will do what has to be done."

Nervous Calm over Currency Market

A good reception to a Spanish bill auction and a some what better than expected German ZEW investor survey helped stabilize the risk sentiment which had been battered yesterday.  The major foreign currencies are mostly firmer on the day, but the modest gains have left the short-term momentum indicators a bit over-extended.  This would seem to favor early North American participants selling into the currency bounce.

Risk Off Monday

The US dollar is firm against all the major and emerging market currencies.  Equity markets are lower, giving back all of Friday's gains and more.  The euro has dropped 1% and the next level of support is seen near $1.3200. 

Three Key Developments

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Three events took place last week that will shape the general investment climate in the weeks and months ahead.

Pump it Up

The ECB significantly increased its liquidity provisions. Some observers seem to be disappointed that the ECB did not flout its own legal mandate and indicate it would buy an unlimited amount of peripheral bonds.

This should not interfere with an appreciation of what the ECB is doing. It is willing to lend to member banks as much money as they want (and have collateral for, whose definition was also broadened) for three years.

The Long and Short of It

The most important take away from this week's developments is that there will be no European joint bond and no substantial change in the ECB's sovereign bond purchase program AND that the euro and monetary union will survive.

Draghi Turns Spigots, but Still a Drag

The ECB has giveth and taketh away today, leaving the market pessimistic about the outcome of tomorrow's summit.

The ECB delivered the much expected 25 bp rate cut, though the decision was not unanimous. There was some immediate disappointment by some players positioned for the outside chance of a 50 bp move. The ECB addressed the liquidity and collateral measures to address the credit crunch. The ECB will provide two 3-year refi operation, which will replace the previous long-term repo operations (LTRO). Participating banks will have the option to return the funds after one year.

Wrestling with the Imponderables: Worrisome Signs

Opinion polls and surveys are finding an increasing number of people expect one or more countries to leave the euro zone. Investors are anxious. What is to be done ? What makes this so difficult is that there are so many moving parts and possibilities. The way the question is asked often conditions the answers.

The initial reaction to what happen in the euro zone breaks up is that the new German mark would appreciate. However, that assumes that capital will flow more or less freely, but this seems unlikely to be the case. A break up of the euro zone would likely be coupled with capital controls. Moreover, given the exposure of the BBK through euro zone payment system, Germany would not necessarily be immune.

Key Disagreements at Late Stage Weigh on Euro

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The EU Summit begins in a little less than 24 hours and the signals coming from European officials are anything but encouraging.  We did not expect the kind of closure than many investors want to emerge from this meeting.  We did expect some important steps toward erecting the scaffolding to facilitate great fiscal union. 

There are several areas of disagreement.  It is simplistic just to cast this as a German vs France difference, but it does suffice to capture the fissure. 

Two Developments Push Euro Lower in Europe

Asia extended the euro's recovery, but developments in Europe have seen it surrender the earlier gains and move back toward the lows seen in North America yesterday near $1.3360.  The relatively light participation in the ECB's 84-day dollar auction and signs that even at this late date there are key disagreements among euro zone officials about key issues like private sector participation, EFSF/ESM, and role of IMF seemed to sour the mood. 

Liquidity is the Word

The Bank of England introduced a new contingency liquidity facility--Extended Collateral Term Repo (ECTR) Facility. The purpose is to have a facility in place in case there is a market wide shortage of sterling liquidity. This is currently not a problem, so the facility is preemptive in nature.

Euro Recovers After S&P Slam

The euro sold off amid the rumors of the S&P decision to put on credit watch 15 euro zone countries.  Spared was Greece, in a world of its own, and Cyprus, which was already on credit watch.  It sold off further in Asia, but Europe has shrugged it off and, with the help of a monster manufacturing orders report from Germany has fully recovered from the drop that took it to a 4-day low of about $1.3335.  Offers are seen in the $1.3430 area now. 

CNBC: Focus on Europe and ECB

China and Europe

Many observers mistakenly think that because China is not a parliamentary democracy that is it monolithic. Yet repeatedly we have seen this is not the case. Many officials at the PBOC, for example,seem more sympathetic to a more flexible currency regime, while officials more involved with commerce and trade are more opposed.

US Dollar Softer on Slightly Better News Stream

The US dollar is beginning the week on a softer note, but well within recent ranges.  Most of this week's key events lie ahead.   The day earlier than planned and somewhat larger Italian austerity plan coupled with talk of ECB purchases has helped send Italian bond yields sharply lower, with the 10-year yield falling over 50 bp toward 6%.  Spanish 10-year bond yields have fallen about 40 bp to near 5.25%. 

March to Folly: Underestimating Germany and the ECB

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The House of Finance is accustomed to a cacophony of opinions and voices. Rarely out of the free market place of ideas has such a strong consensus emerged: Germany and the ECB must capitulate.

The ECB must act as a backstop and support the bond markets ofthe heavily indebted euro zone members. Germany must relent and permit the issuance of Eurobonds, jointly backed by European countries. At the end of the week European heads of state will be meeting in the 5th summit since the middle of last year billed to offer a comprehensive solution. If the summit does not resolve to execute these actions, many think the euro zone will not survive.

Some Thoughts on the U.S. Jobs Report and Implications

As often is the case, economic data can be a bit of a Rorschach test, in that reasonable people can see and value different aspects of the report. This holds for today's US employment report. The headlines were good--140k private sector jobs were created, near expectations, back months were revised up by 72k, and the unemployment rate fell unexpectedly to 8.6%.

The details are less inspiring. First, on the surface it may appear there has been some acceleration of job creation, but this is not really the case.

Hard Asset Investor: No Race to Debase

I did an interview with Mike Norman of Hard Asset Investor you can watch it below or here.

Short Note on Canada

The Canadian dollar has appreciated about 1.5% since the start of the week. The general investment environment has improved compared to last week and the Canadian dollar responded well to yesterday's central bank swap line decision and the stronger than expected Q3 GDP (3.5% annualized vs 3.0% consensus). Yet the Canadian dollar has under-performed the other dollar bloc currencies in this week's general recover of all the major currencies against the US dollar.

Ironically, while the Reserve Bank of Australia is likely to cut rates, the Bank of Canada will not, the Canadian dollar is still the laggard.  

Fasten Your Seatbelts: A Week that Can Rock your World

Starting today and running through next week, there is a key event nearly every day.  The reports suggesting that the EU may sanction bank bond guarantees through next year is also indicative of the kind of headline risk that will exist as Europe officials grapple with the crisis. This is also an important element that can help banks secure their funding for next year.  European banks reportedly have about 800 bln euros of bonds maturing in 2012. 

Today Sarkozy is to give a speech in France that will outline proposal to increase fiscal coordination and convergence in Europe.   Friday Merkel's speech to the German parliament is to cover the same issues as Sarkozy.

Great Graphic: Making Sense of Europe

Check out this my webmaster found over at Big Think. It breaks down who is in the EU, Euro Zone, EEA, etc.

Wating for Another Shoe to Drop

The major currencies are consolidating in yesterday's broad trading ranges, but the "real" action is in the European bond markets, with acceptable auctions in Spain and France, helping support of a bond market rally that was already underway, encouraged by yesterday's step to increase access to dollar funding.   

Egan-Jones cut France's credit rating yesterday and Fitch made some cautionary remarks today but French bonds have launched an impressive rally that has brought the benchmark 10-year yield 25 bp lower, bringing the premium over Germany in by a dramatic 60 bp over the past 5 sessions.