Guest post by Peter Tchir.
Is it a New EU?
Of the major players coming into June 2011, almost none are left. Attrition and elections have taken care of most of the major players. In fact, you could make a case that Merkel is really the only major player still in the same position.
I think this is important particularly for the ECB. Draghi has now had time to establish himself in his role, and get comfortable with the people at the ECB, the various central banks, and the politicians. He entered the role with a bang – a rate cut, more symbolic than anything, at this first meeting and then began the LTRO’s.
Since then, his efforts to get Spanish and Italian bond yields down have been thwarted by the markets and a deteriorating economic situation. He wants yields low and looks like he is prepared to stretch his powers to fulfill the mandate of “transmission of economic policies”.
How far is he willing to stretch? How much can he do based on that “transmission” mandate? That is the question and we need to get answers, but more and more, it looks like he is prepared to be aggressive. It may not be a completely new EU, but it has changed a lot in a year, and the ECB does look to be a new ECB.
Merkel managed impressing investors on Friday. The question is, what is next? Spiegel on Merkel’s dilemma going forward.
Merkel launched her counterattack on Friday afternoon. In a post-summit press conference, she said one first has to sort things out after such a long night, and she tried to counter the impression that she had been out-maneuvered by Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy.
Merkel underscored that she had pressed to make sure that the rules of the ESM were adhered to. She said she had successfully defended the ESM’s preferred creditor status and that only a single exception would be made, for Spain. Likewise, she noted that, if at all, the ESM would only provide direct assistance to private banks after a long process of setting up a banking supervision mechanism, and that Germany would have several opportunities to exercise its veto during this process.
Guest post by Doug Short.
Markets around the world rallied last week, or to put it more precisely, rallied in overdrive mode on Friday. France’s CAC 40, the top performer with a weekly gain of 3.42%, had a four-day loss of 1.27% at Thursday’s close. But the outcome of the eurozone summit sent buyers into a frenzy (with some significant short covering, I would imagine), and the index rose an eye-popping 4.75%. The German index exhibited the same behavior — down 1.81% for the week at the outset of Friday’s 4.33% advance.
China’s Shanghai Composite was the odd man out. It lost 1.57% for the week despite its 1.35% gain on Friday. The index is down 35.89% from its interim high in 2009. The signs of slowing economic growth have taken a toll on the Shanghai, and the Chinese Manufacturing PMI, due out later today, will probably influence the Monday’s markets in the People’s Republic.
The table inset in the chart below shows that four of the eight markets are in bear territory — the traditional designation for a 20% decline from an interim high, down from five last week with the German index rising above the bear stigma. In our gang of eight, the S&P 500 remains the closest to an interim new high, down only 4.01% from its April 2nd peak.
When Ben Davies speaks on gold, silver and other metals, listen carefully. From the Metall Woche.
Today we publish a highly recommended Interview with Ben Davies, Fundmanager and CEO of Hinde Capital in London. This interview really chronicles actual history. Ben Davies shares his views with us about the actual events in the financial system in a very impressive way and why physical gold is a must have in everybodys portfolio. You will not only listen to the views and opinions as a fundsmanager. Ben is kind enough to let us be part of his personal and private settings as well. For us at Metallwoche this makes this podcast unique.
Full must listen to interview here.
Guest post by D Short.
The 2012 rally accelerated last week as the average gain of our basket of eight markets rose from 0.06% the previous week to a stellar finish of 2.27%. World leadership was generally consistent with last week, with the Asia-Pacific region taking three of the top four spots. The Shanghai Composite is the exception to the geographic pattern, dropping from second place to the cellar. Despite its weekly gain of 1.38%, the S&P 500 again found itself in the bottom half of the pack, but finishing above the FTSE 100 and Shanghai Composite.
The adjacent table shows the 2012 year-to-date performance of our gang of eight. Four markets have double-digit gains at the end of seven weeks, with the Nikkei’s outstanding 4.88% gain over the last five sessions putting it into the double-digit club. The other four markets continue to have healthy single-digit gains. On a YTD basis even the worst-performing FTSE 100 has an impressive gain of close to six percent by mid-February.
We hinted about the rally on Friday evening, “Yes, it was an interesting session today, but the move up earlier today was probably telling us to cover the shorts. Despite our bearishness, we believe the market is reaching levels where the reward of shorting further is limited.”. Friday’s candle was a very nice reversal candle, telling all the new smart shorts to look out for the upside, and upside we got. Our only recap commentary today is actually the low volumes theme. A rally in panic with low volumes, will only produce more volatility and not a sustainable reversal to form a base. This is what HFT dominated market produces, frustrated hedgers, chasing their tails. Volume Chart of the Global Squeeze below. Not very impressive.
We believe the SPX is poised to move higher and the market will reach 1,360 by year end. On August 10th, we made a rather contrarian call that while we acknowledged the considerable macro risks, the market could be bought and had a near term tactical target of 1,250. Among other things, our argument was predicated on absolute and relative valuation and that our “Wolf Market Floor” for the year of 1,120 for the year had been reached. Subsequent to this report, the market spent several weeks basing (in a rather noisy way), though with an occasional brief dip below this “floor” level. Yesterday, our 1,250 near term objective was achieved; we now see the table set for the market to sprint higher, like a hungry wolf, to 1,360 by year end. The 1,360 level is a key Fibonacci level derived from the 2007 highs and March 2009 lows, and also close to the YTD high of 1,370 (cash) reached on May 2.