FYI | Oct 17 2011
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
The G20 finance ministers meeting ended yesterday and (as usual) failed to tell us anything new. The G8 meetings used to have more of an “excitement factor”; the enlarged format tends to be an exercise in diplomacy.
However, next month’s leaders meeting in the luxurious surroundings of Cannes (most famous for its annual film festival) could well be the most momentous European event of the year. All eyes will be on the first screening of the EU’s big bazooka, the Franco-German version of shock and awe to finally stabilise the Eurozone and its sovereign problems.
Apparently next weekend’s EU leaders summit will come up with a three-pronged plan to 1, re-capitalise the banking sector to the tune of EUR200 billion, 2, Deal decisively with Greece, which probably means a haircut on Greek debt possibly as large as 50% and 3, enlarge the EFSF to a whopping EUR2 trillion. Essentially, this plan means that Greek bond holders will be thrown to the lions in an attempt to save Europe’s other private sector bond holders and stave off defaults elsewhere.
So Brussels has eight days to come up with THE PLAN to save the eurozone and vindicate the stunning rally in financial markets over the last 2 weeks. The magnitude of the rally has been impressive: copper has had its largest 2-week gain since 2005, US 30-year Treasury yields rose by the most in a year and the EURUSD is knocking on the door of 1.4000.
However, I can’t help but think this may be an “animal spirits” rally. We don’t know how the EU will solve the crisis, it has fallen short on multiple occasions before and we are still in the dark whether the big bazooka will be enough to help keep yields on Spanish and Italian debt low for the long-term. Many people have said that markets are rallying on blind faith; however, I would say it is fear – fear that the next guy will jump on the bandwagon and earn a fortune. No one wants to be out in the cold in an environment where yield is so hard to find, hence the deafening thud of bulls rushing to get their places in the queue for risk over the last couple of weeks.
You may think the rally is built on sand, but there is no denying that it continues to build momentum. Added to that there is some technical justification to suggest this rally may have further to go. EURUSD closed above the key 1.3820 Fib level and the S&P closed at the cusp of its recent range at 1,224 on Friday. This could be an interesting week. However, I have to share the tiny inkling at the back of my mind that we would be in for a buy the rumour and the sell the fact situation.
But there could be some time to buy the rumour: weekend reports in the Telegraph suggest that the EU summit will hammer out the details of the “Big Bazooka” but they won’t be presented for another two weeks at the Cannes summit on3/4 November. So that leaves us with lots of time to think up the perfect scenario where the Eurozone is saved and this nasty mess is put behind us, which allows EURUSD to creep up to 1.4000.
On another note, there were a couple of stories that caught my eye over the weekend. The first was comments from US Treasury Secretary Geithner after the G20 meeting. His last outing with Europe’s finance ministers ended badly when he lambasted Europe’s financial leaders for their snail’s pace at dealing with the crisis and then had to deal with the wrath of his sharp-tongued Austrian counterpart.
However, Geithner is obviously a man who doesn’t have to be told twice. His diplomatic skills have increased ten-fold since then when he said on Saturday that “When France and Germany agree on a plan together and decide to act, big things are possible.”
In the midst of the Eurozone crisis the whole world may be “Occupied” by anti-capitalist protestors. Rome seemed to get the brunt of the violence this weekend. Things were calmer in London, 300 people camped out in front of St Paul’s – hardly the world’s centre of capitalism – because they couldn’t get into Paternoster Square and the London Stock Exchange. The UK has obviously had enough of rioting and there is unlikely to be much appetite for Occupation. Added to this, last week the board of ice cream maker Ben & Jerry’s released a statement of support for the protests. Since it is owned by conglomerate Unilever its support makes the whole movement decidedly “un-cool”.
So as we head into a new week, price action may start off positive for risk (i.e., dollar negative, good for the euro) but it could dwindle later in the week. Inflation data in the US released on Thursday is expected to show that core prices rose at their fastest annual pace in three years, combined with better than expected economic data that caused BarCap to revise higher its growth estimate for the third quarter, it makes a further round of QE even less likely.
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