Likely to remain volatile into next week. + US 10 Year + Is Greece hotting up again?

The US equity markets continues to behave in a volatile nature, this is not surprising given the weight of news and data over the next week. A QE story seems to hit the wires about every 5 minutes, it appears that opinion remains strongly divided both within the Fed and outside. My call is that Bernanke, being the sly old fox, will pander to both sides, perhaps not doing as much as the most extreme expectations, but none the less providing a strong boost, but within that also allowing flexibility for the future so that of he needs to hit it heavy and hard he can, or if he needs to ease back he can. - I do not expect the issue to actually be resolved fully next week, thus this will likely remain an on-going theme for the next several months, adding to increasingly volatile markets. I do not think much, direction wise, will be resolved until next week at least, but clearly the news will have the ability to slice a chunk off of the market, or give it an extra boost, which is why we are seeing increasingly volatile short-term action.

Moving on to US 10 Year yields. This is obviously a central theme in the on-going QE debate, since these are likely to be one of the main tools used by the Fed in the QE operations. However, an awful lot has been priced in on these, and in the past few weeks some of the froth has started to disappear from the 10 year t-note futures markets: Yields have seen a decent pick-up, rallying almost 40bps from the low 2.30s to the low 2.70s yesterday. I had been expecting this to move lower towards 2.00%, however whilst I do not rule this out for a later trade, short-term it looks like a low is in, and the risk of a rally towards the low 3 handles is a real possibility in the next few months. The first chart below shows US yields over the past couple of years.

The chart above shows how the yield has been forming a 'Falling Wedge' pattern in recent months, whilst momentum as measured by the 10 day RSI has been diverging upwards. The past couple of days has seen a breakout from the wedge, the yield may comeback to re-test the top of the wedge, but the risk is that it holds and moves higher. - The 10 Year t-note continuation future chart is also supporting these assertions. The top chart below shows this on a weekly basis. A couple of observations which I have highlighted:

• Firstly the strong similarity between the recent price and momentum action and the price and momentum action at the interim top in early 2008, both highlighted within the mauve ellipses. Note the sharp correction led to an extended consolidation, after which the main rally re-asserted itself. 

• Secondly the similarity between the bigger picture price action and the next chart below which shows Gold weekly 2006 - 2010, in particular the price behaviour as highlighted by the large red ellipses on both charts. On both occasions the breakout of these large patterns led to strong dynamic rallies. In the case of the Gold the rally eventually led to the Gold price being well overbought in late 2009. This saw a sharp correction followed by consolidation, eventually however the rally in Gold, as we know re-asserted itself.

The market is likely to see some rebound I think before and possibly around next week's news, however the move to higher yields could be a theme in the next few weeks.  Will this affect stocks? I am not sure, historically these markets move inversely, however the relationship between these two has not been consistent in recent years. However, if stocks were to suffer a sharp drop, then it is likely that bonds rally and yields drop, thus if the above scenario above were to occur, it is likely it would happen against a steady or rallying stock market environment.

Finally with regard to Greece; there has been a lot of negative talk hitting the wires these past couple of days. One theme seems to be how, with economic conditions weaker than expected (not helped by the EURUSD recovery), tax revenue is coming up short of projections in parts of Europe, and as a result countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year. In the past couple of days things have started to stir in Greece whilst Ireland has had mounting issues in the past couple of weeks. The charts below show the 5 Year CDS for Greece and Ireland over the past 6 months, below that is a chart of the SP500 Index and the EURUSD. I have highlighted the two prior occasions when the 5 year CDS prices moved up sharply in the past 6 months, and how this saw sharp drops in the SP500 and the value of the EURUSD. In addition I have placed emphasis on the action of the past week. - If this whole Euro Sovereign Debt issue were to explode again, then the above analysis is likely to be wrong on the T-note, as US yields should drop as a safe-haven bet while equities would once again probably turn ugly. 

 

EURGBP Overview and Greece getting going again !!!!.

Yesterday's GBP budget has been given an immediate vote of confidence by the Foreign Exchange Markets. Cable has rallied 2 Big Figs in past 24 hours, whilst Sterling has also seen strong gains versus the EURO. In light of this I am posting a EURGBP chart showing the long-term picture, (Note this was created yesterday with EURGBP @ 8306, it has since dropped to 8240). This shows a large topping pattern over the past 2 years (either a Reverse Symmetrical Triangle, or Double Top), this should create strong downward pressure on this pair going forward. - Strong support zone @ 8170 to 8230 held a first attempt earlier this month, and may check the decline again, however I would favour an eventual break through here towards the second major support zone around 7700/7780. -- Weekly Momentum studies are supportive, (See below). The weekly ADX is turning up from low levels with a negative DMI in the ascendancy, suggesting a bearish trend is establishing itself, whilst weekly RSI is only just pushing the oversold boundary, suggesting some way to go before becoming overextended, and MACD shows strengthening downforce.One further set of charts I wish to post is Greece 10 Year Yield CDS v the Lehman Share price (Inverted) over its final 2 years, the final period being Lehman's death spiral. Note: the strong similarity in the appearance of these charts, and also the peak of the Greece CDS from early May, pre-ECB rescue package announcement, is in danger of being exceeded. The chart below is last night's close, already today the Greek German Spread has widened 66bps or 9% on the day. Greece may be yesterday's story, but may soon become tomorrow's story if it carries on like this.....

EURO - Where next ?

I'm a bit tired, a bit poorer and slightly 'worse for wear' this morning, following a great day at the races yesterday. --- However, it served as a nice little reminder to me that form does not always count, no matter how strong a favourite a horse may be, even when running under ideal conditions. - I can apply that little metaphor to the market at the moment. Yesterday morning, having seen the spread widening of the previous day in Spain v Germany, and the Greek downgrade, followed by further huge spread widening, I was adamant that the Euro was going to get hit again. However, it found surprising strength, and I guess I should have put a little more faith in my own analysis of a couple of days ago, when I suggested that breaking above the short-term resistance at 1.2150 and closing over the 15-day moving average (1.2170), would provide a boost to the Euro. -- Hence I now find myself at somewhat of a juxtaposition. On one hand the spread widening of Greece, Spain, Portugal and Ireland has restarted with vigour over the past 2/3 days, but Italy has thus far been immune from this latest bout of worries, as have the core countries of France and Belgium. --- On the other hand, the technical break over 1.2150, and the hold of the re-test of this level yesterday favour further gains towards the 40-day moving average, which is currently 1.2544 (though this is dropping sharply and will probably be in the mid 1.2400s in a few days time). Yet, countering this, I view the move higher in the Euro as a correction in an on-going downtrend, which will eventually take the Euro much lower... ---- which Horse shall I bet on ???? Decisions decisions. I think I'll sit this one out for now actually, although my view fwiw is that as long as the core spreads stay calm, then the Euro could make some further gains, though that could change if Spanish spreads go into overdrive ---

Below are charts showing how the Spread of Spain v Germany and Italy v Germany have diverged in recent days.

Spain v Germany widens again. - May put a dent in Stock's rally.

The spread between 10 year Spanish and German yields have widened significantly today, reversing much of the recent narrowing over the past week. This may cause headwinds for the recent stock markets gains as there has been a rough correlation between this spread and moves in the US stock markets over recent weeks.

The charts below show this rough correlation. -- Note; last weeks widening in this spread also saw a widening in Italian and French spreads versus Germany, thus far Italy and French spreads have not re-widened, perhaps mitigating the effect somewhat, however if this widening gathers steam over the next few days it could a) spill over into other European markets. b) start to affect risk appetite and hence stocks.
- Also worth pointing out that Moody's has downgraded Greece again in past hour or so. http://www.zerohedge.com/article/moodys-downgrade-greece-ba1-a3-stable-outlookand rbeen stable.

Payroll Day & Eurozone Spread Widening.

Today is all about US payroll numbers. its gonna be big,,, but how big.... that is the question..... The reason its gonna be big, as everyone knows is the census worker hiring. The average guesstimate according to Bloomberg is 536,000, however there is a large range from various analysts around this number ranging from the low 200,000s to the mid 700,000s. - I am always amazed that this number is given so much credence by markets, a number that is calculated using so many statistical adjustments, and that is revised so many times over the coming months, so much that its initial release is often meaningless, and yet it probably gets more focus in markets, and more initial trading reaction than just about any other data release on earth.

The markets over the course of this week seemed to have entered a period of calm, relative to action through May. The SP500 had its smallest daily trading range yesterday since late-April. EURUSD continues to gyrate in a spiraling downward fashion within its recent 1.2150-low 1.23s range. USDJPY has been gaining slowly on a less risk adverse environment, perhaps helped by the political situation in Japan, this may have helped calm currencies which reside on the other side of the carry, such as CAD and AUD. So it seems that near-term direction no wmay hinge on a number which is calculated using a somewhat contentious method, which is going to be distorted by a very heavy one-off adjustent, and which will be probably be revised several times over the coming months.

Meanwhile, it is worth a mention that periphery Europe spreads have been widening again over the course of this week. The Spain v Germany 2 yr spread has widened to 225bps and 10 yr spread has widened out to almost 190 bps, that is respective gains of 45 and 37bps over the past week. Other spreads have been widening too; Italy, Portugal, Ireland and Greece have started to rewiden, even France has widened so far this week from 26 - 39 bps, the largest weekly move since 1995. This may well be the early stages of the next phase of the Sovereign Debt crisis, with larger more significant European Countries becoming affected. -- Further to this I have posted a couple of charts below, the first chart is the 2 Year Spanish Gov Bond Yield weekly with 50 week moving average. In Technical Analysis parlance, this may have traced out a 'Rounded Bottom' or 'Frying Pan bottom' pattern, which could portent significant gains in yields in coming weeks. - Below that I have shown how a 'Rounded Bottom' pattern formed on Greek 10 year yields in the latter half of 2009, and how this evolved into the significantly higher yields (somewhat of an understatement) through this year.