Are The Currency And Equity Bears On Holiday?

After a steady stream of bearish news early in the week, it seems the pressure on the markets is relieved. At  the US opening on Friday, equities moved smartly ahead. We will now watch to see if the bulls can hold the rally together.

Perhaps it is wishful thinking, but the markets think the European news may be a little better. In Spain, where the central government is moving to nationalize the nation's fourth largest lender, Bankia, traders had been doubtful the government would have the funds to execute this plan. It was reported in a Spanish newspaper, the government is involved in negotiations with European funding for this project. This does sound a bit vague, and the portfolio of loans at this bank is significant, perhaps as much as €37.52B.

It will take a well-healed angel to finance this bail out. The IBEX 35 did make a 3% recovery but the bond market cynics are keeping the bench mark 10-year note above a 6% yield.   The breaking Spanish property bubble may be the most expensive problem seeking a solution, and Europe seems to be lacking a strong effective leader, able to find a solution, build a consensus, and take action.

In Greece it is now the Pasok, or socialist pary's turn to attempt to form a coalition government. Since they had been signatories to the bailout and austerity plans, it is doubtful they will be successful getting others to join them. Failure will increase the odds of a new election in mid-June. However, failure to refinance on May 15th, the €430M of bonds due to holders of bonds who rejected the recent debt swap may constitute a default. This horror shows seems endless.

In Ireland where betting is legal, the Irish Times reports:

. . . Want a flutter on Greece leaving the eurozone? It may already be too late. . . A surge in bets has forced bookmaker Ladbrokes to suspend betting after repeatedly slashing the odds on Greece dropping out of the eurozone by year end.

They are also giving 4-to-1 odds that two or more states will leave the euro before the end of 2012.

There were reports yesterday of the Chinese buying in the euro. As I have observed before,
it seems when the euro approaches the 1.30 area, there is underlying support and the euro then rallies. Since the forex market, in total, lacks visibility, we simply do not know what orders are lying in the weeds, undetected by the many market participants.

Recently there have been rumors of Chinese buying around the 1.30 area, and is given as a reason why the market is skittish when approaching that level. There are several suggested reasons for the Chinese buying interest. One theory is that Europeans, as the largest buyers of Chinese goods, may be bigger buyers if the euro is strong. Another theory for the Chinese support of the euro, is the Chinese wish to divest a portion of their reserves away from the USD.

Personally neither of these theories makes much sense to me, but if you are sitting at a poker table with the largest pile of chips, this may not foster rational behavior.

Well, we have taken out the 1.30 support level.  We note that for the last three days there has been a heavy futures trade. On a down market the open interest in the futures has increased over 27K contracts or about 9% of the OI.  We do not know what the Chinese are up to but the increase in the OI tells us there are new spec shorts. The latest COT report showed the large spec, probable hedge funds short over 105K euro contracts. Do we have the funds on one side of the market and the Chinese on the other?

How about trading the swissie instead of the euro. Granted the SF is pegged to the euro by the SNB, but the SF is a mirror of the euro and the OI is likewise going up. The daily chart of the SF has the Monday gap, and the MACD is turning higher. Try to buy a pullback to the .9260 level and see if we can get a run up to the .9550 area? 

As always, watch your stops.