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Sunday, July 29

29th Jul - Weekender: Views & Off-Topics

Spanish 10y yield (click to zoom)
The Spanish yields (10y, 2y) are now currently at an important juncture. Supposing one does not know about the newsflow and just looking at the charts hints that similar moves have been typical – as the yields have made new highs, some sort of verbal or policy intervention has been done, and the markets have calmed a bit – but the previous efforts have not lasted long. The recent drop in yields still fits this pattern perfectly, and that would suggest short bond positions. Draghi may have overpromised, but that is perhaps not a negative thing – he (and others as well) might be tempted to overdeliver, so the good old “buy the rumor, sell the news” might not hold this time. 

Spanish 2y yield (click to zoom)
For the Europhiles the most optimistic scenario is massive QE, haircuts on ECB’s bond holdings, a path to sustainable debt levels and kicking Greece out of the euro. This does not equate banking union, trust in peripherial banks, adjustments in relative competitiveness and end of current account imbalances. The most optimistic scenario thus translates in my mind as more muddle-through and continuation of the crisis. A massive response could improve the picture for months, but would not solve the underlying issues.

S&P index looks strong - again
The timing of Thursday’s verbal intervention came on the same day that Reuters reported Spain had discussed a 300bn bailout package with its German masters – on top of the previous 100bn, and was apparently bluntly rejected. Some QE from the ECB will definitely not save Spain, but it could save the day, week or even two weeks. That is it.

On top of the European policy response, there will be the FED. They will do something, or maybe a combination of several measures. Perhaps they will do it not now but the next time, or perhaps they will coordinate their actions with other central banks to really “send a message”. US stock market is nearing the recent rising channel’s upside, and again just looking at the chart shows that direction is up, target levels are very near but there is still no sign of weakness. Out-of-the-money put options might be an interesting purchase around current levels – possibility ending the week at the bottom of the range is not that far-fetched. Otherwise, waiting for a topping formation on hourly charts would be the next action.

EUR/USD is interesting – the magical 1.20-level was rejected, and the price has done what it has loved doing – breaking to marginal new lows and then coming back up slightly above the previous lows. The resistance area is around 1.23-1.24, and we ended there on Friday. Much depends on which one prints most – the ECB or the FED. As I have argued previously and elsewhere, solid policy response (=printing) by the ECB is not necessarily negative for the euro. It might actually strengthen the euro a lot. This is what the market did last week!

Previously on MoreLiver’s:

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