European Monetary Union appears fragile

These are extremely difficult conditions for traders to navigate portfolio’s - as tough as I have seen for many years - and this can be seen front and centre by just how many times sell-side strategists are changing their call on ‘Grexit’.

 

Greece
Source: Bloomberg

An internal war seemingly rages within the European Monetary Union, with heads of state and finance ministers showing their hand.  It’s hard to believe we have seen the union showing such fragility and as the Finnish Finance Minster put it ‘Greece is being given two choices’. From here in Australia, however, the situation seems so convoluted that it just isn’t that black and white. It seems traders will have wait another 70 odd hours now for the Greek parliament to potentially vote through some very austere measures that could take Greece back to where we were nine months ago, although there are signs emerging that we could see slightly more favourable terms for Greece than what was talked about on Sunday.

Traders have now had to deal with three weekends of understanding the various permutations of various Greek related binary events and there will no doubt be more to come. However, it’s interesting that for three consecutive weeks EUR/USD has rallied after a weak open and filled the gap from Friday’s close. European equity markets saw bullish price action on Friday as traders got excited about the Greek proposal, but they hadn’t expected the Eurogroup to counter with such austere measures. Naturally, in this environment one would expect disappointment to be seen in our European opening calls but the idea of a comprise has seen one-way traffic and despite the DAX called down 112 points (or 1%) at one stage, the markets are staring at a flat open.

S&P 500 futures have been a real backbone behind these calls (and Asian markets) falling 0.8% on open (Dow was down 133 points), but have since recovered nicely on talk of ‘compromise’ and are now in positive territory. Japan and Australia have gone along for the ride. China has too Watch moves in the German DAX with the index testing the April downtrend. Traders seem to be warming to risk and a close today above 11,432 (the April downtrend) should see a quick spike to 11,600 (June highs) and onto 12,000. I would look at long positions on a closing break of the downtrend. Although given the event risk, I would keep position sizing small.

  • China’s trade data showed a lower than forecast surplus at RMB 282.2 billion. However the internals were slightly better than expected with imports declining 6.7% (versus -16.2% expected) and exports up 2.1% (versus 1.2% expected). CME Copper has fallen 1.2% today, while iron ore futures have held firm.
  • All eyes are on China’s Q2 GDP (announced Wednesday) with expectations of 6.8%. The economists range is 7.4% to 6.5%, but given local press has ‘speculated’ that this figure will be 6.8% recently, then that is what we shall most likely see. Still, it will be the first time since Q1 2009 that China could have a 6 handle in front of its year-on-year growth rate.
  • It’s interesting to see the correlation between iron ore (spot) and Chinese equities. The impact the moves in the stock market should directly have on iron ore is low, so this is a bizarre correlation and iron ore (and copper) should have a much cleaner correlation with housing.
  • EUR/USD is caught in no man’s land and the RSI at 50 tells you a picture that the pair is delicately positioned. The pair is trying to position itself back in the multi-month channel but traders don’t want to be short in case of a positive agreement and don’t want to be too long in case of ‘Grexit’. The fundamentals and techincals are perfectly balanced, but everyone is waiting with anticipation.
  • The Nikkei (Japan 225) has re-claimed the 20,000 level. However, the short-term trend is lower and the bulls will need to see a break of the trend resistance of 20,200.
  • All-in-all with the bar set low for US earnings, Chinese equities likely to head higher and Greece likely to avoid a Grexit (in my unconvinced opinion) then I am expecting markets to see more positive price action this week.

 

 

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