Stress Tests, Debt Talks and More

The week will finish with a bang.  European bank stress test results, and what might be the softest headline CPI reading since Q2 last year, the Empire state survey, where the forward looking new orders component may be the most important component, and the ongoing US debt talks. 

Press reports have suggested that 10-15 European banks will be found to need more capital.  Spanish cajas are likely candidates.  Given the focus on the sovereign aspects of the crisis, the stress tests will most likely not have a big impact on the markets.  However, the risk seems asymmetrical for greater potential to have bad news than good news. 

As suggested yesterday, Bernanke did seem to correct market misunderstanding about his remarks on QE3 at midweek.  There is a bar.  The bar is high.  Renewed risk of deflation could be one such condition.  A soft CPI report today may be cited by some, but the kind of evidence likely needs several months at least and any one high frequency report is unlikely to be decisive.  At the same time, the Empire State Manufacturing survey is released for the first part of July and a big bounce is expected from -7.79 to 5.0.  Shortly after, the US reports industrial output, which also show improvement and sufficient to have raised the capacity utilization rate. 

The market does not appear to have a large reaction to the S&P move last yesterday, formally placing the US on credit watch and warned of the possibility of more than a one notch downgrade.   US Treasuries are largely study ahead of the data.    The fact that the 10-year yield is still below 3%, would seem to confirm a general appreciation that what is happening in Washington is part of a kabuki--like theatre that will ultimately result in the avoidance of a default by the US. 

From Tuesday July 12 low near $1.3840 the euro had a clear uptrend on the hourly bar charts.  It broke down before Europe closed yesterday and has not managed to get back above it.  Since yesterday's highs a new down trend line has been emerging and it comes in are $1.4200 now.    Momentum buyers earlier tin the week appear to be scaling out ahead of the weekend.  

Another technical development I want to draw your attention to is the euro sterling chart.  There is an uptrend drawn off late Feb lows and the late May lows.  It comes in today near GBP0.8740.  It has held and the euro has bounced.    While it is tempting to buy it, I suspect patience will be rewarded with a better price.  The hourly momentum indicators warn of a pull back.  This will allow a more advantageous entry point.  And the stop can be placed just below the trend line. 
Stress Tests, Debt Talks and More Stress Tests, Debt Talks and More Reviewed by Marc Chandler on July 15, 2011 Rating: 5
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