It's political, stupid!
I posted my 'view' on Sunday, this is an update to that.First, some talk. Europe is not going to hell because Rajoy might have taken some 30,000 euros annually, or Draghi spent his time at the Bank of Italy fiddling his thumbs instead of supervising the banks. Europe is in trouble because of the elections. The pro-European parties are beginning to lose in the polls because the popular opinion is moving against foreign bastards - not only in Spain, but more so in Brussels, Berlin and Paris. In Germany, Merkel is already having hard enough time explaining to the Bundestag why they should give more and more, and why austerity is not working. In Spain, Rajoy's government is going to find it very hard to push additional reforms and find political friends, and the economy might be hit by protest strikes and demonstrations soon. While Spain was promised more time to meet the budget deficit ceilings, it is obvious that austerity is not working in the PIIGS, and we will not see any more austerity in either Italy or Spain for the moment.
It was just a question of time when the bond markets realized this. I think markets have known this for a long time, but have trusted the ECB's promise to do 'whatever it takes'. Markets simply forgot that the OMT program is conditional (must apply for Troika program, country must be accepted into the program by other countries and then the applicant must fulfill Troika's demands, or the OMT will close. I believe markets are calling this 'greatest bluff in history' right here and now. I would like to remind what Bruce Krasting said earlier on the OMT (Finnish version here).
What happens now? The EU budget is still open, Italian elections are ahead, the bailout of Cyprus is to be agreed on, and then there is the zero growth, record-high uneployment and record-high debt levels. Greece is bound to disappoint again as well. I believe the euro crisis is lighting up again. Given what we've seen before during the past 3-5 years, we already know how this goes: 1) Problem denied 2) Problem ridiculed 3) Angry comments, lousy verbal intervention and stupid actions like banning short-selling etc 4) capitulation - either a) all hell breaks lose, debts are restructured and possibly the euro breaks or b) another massive 'believe me'-OMT-type solution or 'death star'-guarantee vehicle will be presented.
Note that the next charts only paint the picture for the current week: market to continue selling off until the Thursday's ECB meeting - after that is finished and nothing comes out of the bank, perhaps we rally again. I'll update again. Oh yeah - click the charts for larger versions.
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| The zoomed-out hourly chart shows the rising channel and the previous major top - that is the target of this move. It would still be a correction in a bullish trend. I also marked what happened the last time after a fast correction. |
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| The five-minute chart shows the last couple of day's fall in the EURUSD (including Friday's wild ride). Note that there has been no technical strength in the chart - the market has kept coming down 'like a waterfall'. |
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| Given the 'waterfall' behavior, and that we have now returned to the previous resistance levels, what should we do? Eventual target 1.3400, currently 1.3500, 100 pips? Sell the pair. |