Years ago, when working as a grain analyst for Merrill Lynch in Chicago, we had a meat analyst whose trading recommendations were almost always wrong. Noting his inaccurate calls, we would then take the opposite side of his trades. As long as Ben the analyst picked the losing trades, everything worked out profitably, but when he got a trade right, fading him would painfully cost some money.
In a fashion, this week’s Euro Summit was similar to the Merrill analyst.
The euro had been selling off in anticipation of another failed attempt to find a fix to the debt problems. To the market’s surprise, there was some positive action taken, and the euro has rallied accordingly, taking the EURUSD from a low of 1.2407 yesterday to a high of 1.2692.
Accordingly, Bruno Waterfield writing in the Telegraph said:
"On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.
Mario Monti, the Italian Prime Minister, celebrated the agreement, reached in the early hours of Friday, as a “very important deal for the future of the EU and the eurozone”.
He could not resist reminding Angela Merkel, the German Chancellor, that Italy had also won on the football pitch, by defeating Germany two goals to one for a place in the finals of the European Championship."
Under the new agreement, the monies being used by the Spanish government to recapitalize their banks will become a direct loan to the banks, rather than a loan to Spain who has been loaning the money to the banks. Further, this money will not be a priority claim ahead of other investors, should there be a default. This reduces the amount of government debt, and might better enable banks to raise private capital.
For Italy, EU bail out funds will be used to buy Italian debt which will attempt to bring down Italian borrowing rates. The ECB is going to be given the expanded role of supervising these new programs. We wonder if there will really be enough money to make a dent in the massive problems.
While these actions can be viewed as positive progress, there are many major unresolved issues for the single currency.
When you combine zero growth with 5/7% interest rates, the economy will contract. When the dust settles we suspect this rally will be short lived.
The positive news from Brussels has given us a healthy bounce in global equities, and has helped the Aussie and the Canadian Dollar. We noted last Thursday that we were looking for a spot to buy the USD versus the C$. From the previous day’s high of 1.0362 the USD has sold off, currently trading at 1.0180.
The Canadian economy is a blend of manufacturing, mostly traded with the US, and commodities. Going forward into the 2H of 2012, we are concerned the US economy will slow at a growth rate less than the 1.9% in the first half. Should that happen, the Canadian monthly GDP number, released Thursday at a 0.3 gain for the month, will contract going forward.
Yesterday (Friday), oil and other commodities enjoyed a rally, but that came after a prolonged sell off. West Texas Intermediate Crude is up 4.47 per barrel today, to 82.16. Much of the Canadian oil comes from the Athabaska sands which is deep in the interior and trades at a discount to the WTI. Equally, the Bloomberg Bakken Crude Spot Price, also tucked in the interior of Minnesota, was only 67.97. With the cost of the oil sands production higher than many fields, what is the price that slows development of those fields. Oil, Canada’s major export is still being exported, but it is fetching a lower price.
We are hopeful Friday’s market euphoria will carry until early next week. Should it do so we wish to buy the USD and sell the CAD in the 1.01 area.
In Europe, the market will figure out problems remain, and it will take a lot more than several hundred billion to solve their debt problems. This is a longer term trade with an objective of 1.06.
[I]I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.[/I]