Coming Week Part 2 Top Market Movers: Willcommen, Bienvenue, Contagion!
A trader’s strategy guide to coming week’s market movers for traders of all major asset classes via both traditional instruments and binary options – with a forex focus this week
- EU Crises Galore
- Red Hot Swiss Francs
- Top Calendar Events
EU Sovereign Debt & Banking Crisis
With the US credit downgrade and deficit in the background for the moment, the EU is once again the likely source of really bullish or bearish news. While French and Italian stock markets were at the center of EU woes last week, these are really just a symptom of GIIPS bond default risk. Last week we first saw reports that Asian banks and the largest US money market funds are stepping away from French bank credit. Further news on this and GIIPS bond yields remains THE biggest potential market driver. As we note in Part 1, a near term calming is possible, though none of the root causes of the crisis have been addressed.
As bad as troubles in too-big-to-bailout Spain and Italy may be (at least without straight money printing), markets are only beginning to seriously consider the risk of contagion spreading to the core. We first saw this last week with France. More signs of trouble in Italy and Spain will be bad, but rising bond yields or bank troubles in France or Germany would be a whole new level of “risk aversion,” though “panic” might be a better term to use.
Ironically, the fate of France depends on whether the contagion can be contained within Greece, Ireland, and Portugal – maybe. Remember that the current questions about France stem mostly from concerns about bank losses from defaults from these nations. That’s why it was France that pushed Germany so hard for the first Greek bailout. Sarkozy knew what the alternative looked like. Tres disagreeable pour La France. French bank exposure to Spanish debt is equal to about 20% of GDP, and so we suspect exposure to Italy is of a similar magnitude. If there are any doubts about France, a credit downgrade could come, and there goes the whole EFSF mechanism. As John Mauldin points out here, the greatest impact of the S&P downgrade of the US may be felt in Europe. The agency won’t be able to appear impartial if it downgrades the US but not Spain or Italy, and thus quite possibly France, and then, well, au revior, bon nuit mes enfants, ect for the EU.
Outside of EU issues, most of the likely market moving events are centered on the forex markets.
No Short Sale Bans With Forex
As a side note, with short sale banning in the air, we take time to remind readers that short sale bans are impossible in currency trading, so currency traders or investors can always short risk assets. That’s because currencies trade in pairs (a currency has to be priced in something), so whenever one trades a currency pair one can’t help but to be going long one and shorting the other. Indeed, it short selling bans spread, this could well feed demand for currency trading as a means of profiting from risk off periods in global financial markets.
For example, if you don’t like European stocks, short the EUR vs. another currency that is more isolated from the EU, or that tends to move in the opposite direction, like the USD or CAD.
Red Hot Swiss Francs
As the only traditional safe haven currency that actually has a sound underlying economy to justify the label (the US and Japanese economies are much more troubled and burdened with public sector debt), the CHF has been on a monster rally for the past year against every other major currency, and that rally has only accelerated since the spring and the advent of the Second Annual Greek Bailout. Markets expect the Swiss to do something to stop the rise out of fear of damage to Swiss exports. Unilateral intervention unlikely, so look for either:
- Some kind of peg to the EUR (the EZ is destination for about 60% of Swiss exports).
- A tax on CHF deposits of about 1%, which would make Swiss rates negative
Top Economic Calendar Events
It’s a typical fairly quiet 3rd week of the month calendar. If sources of volatility from prior weeks are quiet, there’s a chance a few of these might move markets.
AUD: RBA Board August Minutes: August 16 – 01:30 GMT
At its meeting on August 2, the Board of the Reserve Bank of Australia voted to leave the cash rate unchanged at 4.75 %. The RBA noted that the pace of growth had slowed in Q2 due to . Catalysts for supply-chain disruptions from the Japanese earthquake and relatively higher commodity prices. Jobs growth has been sluggish and inflation data indicates price stabilization, which generally coincides with stalling economic growth. Labor market data released this week revealed a rise in the figure from 4.9 % to 5.1 %.
The minutes of the meeting include highlights of the board meeting as well as forecasts of future growth for Australia. Any surprises could trigger some AUD pair volatility.
EUR: German Gross Domestic Product Q2 y/y: August 16 – 06:00
Forecasts suggest that second quarter growth in Germany has slowed considerably, according to a Bloomberg News survey. The GDP reading is expected to show 3.2 % y/y. While this is still strong, it is well below the 5.2 % growth Germany experienced in the Q1. Growth outlook for 2011 and 2012 indicates that Germany will produce above average gross domestic product figures for this period, despite lingering issues in the broader Euro-zone.
The ongoing debt crisis in Europe is a major reason for the slowdown, and will remain the biggest concern going forward. There have been warnings that German exports were vulnerable if the euro zone crisis spread from the GIIPS to the core nations, and a rise in private consumption would not balance out a likely year-on-year fall in the contribution from net exports. With contagion spreading and now even France under suspicion, expect markets to be even more sensitive than usual about Germany’s economic health.
GBP Bank of England MPC Minutes, Inflation Letter: August 17 – 08:30 GMT
On August 4th, the Bank of England voted to keep the key interest rate at 0.5 %. Although the country’s inflation rate decreased from 4.5 % to 4.2 % in June, it is still more than double its target of 2 % and is forecasted to rise back to 4.4 next week. Given the high rate, policy makers at the Bank of England agree that the economic outlook is not stable enough to withstand higher interest rates.
It’s clear that the Bank of England’s Monetary Policy Committee gives priority to economic growth rather than reducing inflation. With economic recovery expected to be weak in the short and medium term, the Monetary Policy Committee will likely hold the bank rate at 0.5 % through the end of 2011. The minutes will include highlights of the board meeting as well as forecasts of future growth for the country.
USD Consumer Price Index, Existing Home Sales, Philly Fed Manufacturing Index for July: August 18 – 12:30 GMT
According to a Bloomberg News survey, economists forecast U.S. consumer price index to fall for the first time this year on a year-on-year basis. The median estimate calls for a 3.3 % July reading. Prior to next week’s release, the consumer price index has steadily risen from 1.6 % to 3.6 % in 2011. The CPI is the headline figure for inflation, reflecting a decline in the purchasing power of the dollar.
CAD CPI for July y/y: August 19 – 11:00 GMT
Canada’s consumer price index for May grew at its fastest rate in eight years. Since then, the consumer price index level has cooled off considerably and a further decline is expected on August 19. The forecast calls for a consumer price index reading of 2.8 % for July, a drop of 0.3 % from the 3.1 % figure in June. Note that the m/m gross domestic product in May showed a contraction in the economy of 0.3 % while economists predicted output to grow by 1 %.
A drop in output and inflation suggests that the economy may be heading into a soft patch. The index will be closely watched by the bank of Canada as their monetary policy decisions are major drivers for influencing the rate of inflation.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE WERE SURE WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?
Coming Week Part 2 Top Market Movers: Willcommen, Bienvenue, Contagion! is a post from: Global Markets
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