The market’s initial reaction from last week’s European Summit was a victory for the debit nations as they stood up to Merkel and her diminishing band of creditors.
Well, perhaps ‘victory’ is an overreach, implying a decisive change which is not the case.
Remember, these bail-out mechanisms are largely unfunded, a promise of money forthcoming at a later date, once approved by the Germans. The Germans may have given the Italians a victory on the football field, but there are more battles looming in the future.
Today we will get a clue how effective the effort has been to reduce interest rates for the borrowers. France and Spain both intend to auction 10 year bonds. Later in the day the ECB will hold a conference where it is expected they will reduce the central bank rate .25% to .75%.
These reports would be enough to jolt the market but the data flow continues the balance of the week, primarily from the US.
In addition to the Thursday US unemployment numbers which have been creeping higher, we also get the ADP Non-Farm Employment Change, and the ISM Non-Manufacturing PMI; these reports will be followed Friday by the US Unemployment Rate and the unpredictable Non-Farm Payroll Report.
Recently there has been a revival of economic pessimism in the US; however, the late week projections do not reflect this. An increase in 92K on the NFP and 8.2% unemployment does not imply we are on the cusp of a consumer led recovery, but they are not terrible. The USD market action might prove bearish should the number be poor. There would be expectations helicopter pilot Ben Bernanke, with co-pilot Yellen, would be starting the engine to disperse the newly-printed money.
Is there a trade here?
Well, as our latest COT Currency analysis reveals, it is a very popular position to be short the euro. Should you get a bearish euro number today, selling the euro lower seems very risky in front of the pending US reports. Further, I am very apprehensive about politically-sensitive labor numbers coming from Washington prior to the pending election.
The Euro bears had a party yesterday, as we are currently flirting with the 1.25 handle. Should we get some bear news and a further break today, it is tempting to take a small contrarian buy in the euro, but what do you sell?
The USD is a very popular long in the futures markets. Perhaps this is the sell. We calculated the total dollar longs in our report was a massive 312.5K contracts. Still, and in the same report, we noted the specs in the Australian Dollar, which had been big shorts four weeks ago, had covered most of those shorts. During this time frame the A$ ran from .97 up to the 1.03 handle.
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I have no positions in any stocks or currencies mentioned, and no plans to initiate any positions within the next 72 hours.[/I]