Morning Market Update

Submitted by Nic Lenoir of ICAP

Without much surprise the market seems to be a bit jittery this morning as it is digesting the details and implications of the European bailout plan. It seems people realized quickly that this was just a little debt switcharoo from one balance sheet to the next. I have discussed with clients individually the possibility of Eurozone bonds being created to face the problem for some time now, and while I had considered this is a possibility I had originally dismissed it simply because we would need to see some quantitative easing from the ECB first. For now interestingly it is the individual Treasuries of the Eurozone that have been carrying the load buying distressed sovereign bonds. Obviously the turn-around time necessary to launch new Eurozone securities would not have allowed to respond in timely fashion to the state of panic of the markets last week given the late start by responsible (?) authorities to adress the problems. Now that the cleaner balance sheets of the region are being diluted with toxic liabilities however, it seems the door would be wide open for the creation of such bonds. I still doubt Europe will go that route unless it is the ultimate last resort and even then, this may be a pill Germans won't swallow to ensure the well bailing of their Mediterranean friends and preserve the political legacy of the post world war II era.

In terms of market response, as we pointed out yesterday 10Y treasuries and Bunds observed their channel support and bounced from Monday's opening levels. As long as these supports aren't violated the market should keep moving north. We included the weekly bund chart because we are getting awefully close to the wave 5 target in Elliott at 127.94 as well as the secular channel resistance at 128.95, and we do have weekly divergence. While we have argued for a little while now that balance sheet dilution in Germany would be a negative for the bund market, it is worth observing we also are at very important levels technically on the weekly (long term) picture. We are waiting for a short-term signal to enter a short Bund recommendation still.

S&P and Nasdaq futures have retraced 61.8% of the sell-off yesterday so in theory they could be setting up for the next leg down. We are bearish in the medium term as long as the market does not bypass 1,175/1,180 (corresponds to the 1,990 level for the Nasdaq future). However, in the short-term, 1,157 should not be bypassed otherwise the market will trigger an inverted H&S and go challenge this 1,175/1,180 zone. It is not our preference but we remain respectful of price action.

Good luck trading,

Nic

Comments

[SWRichmond]

Still wondering here when some critical mass of "investors" and traders decide that the markets are completely in the hands of their enemies and pull their money out so that it can't be stolen.

[glenlloyd]

All it's ever been was a debt switcheroo. The problem being that the recipient is often in no better position and worse after the switcheroo takes place. The only space where this hasn't yet come home to roost is the US, where I heard one congressman say once to BSB, "If you were a bank you'd be on a watch list."

If you don't liquidate you never really solve the problem.

[boricuadigm-shift]

I'll just add this:

:-)

http://jessescrossroadscafe.blogspot.com/2010/05/silver-s-q-u-z-would-yo...

[Printfaster]

The notion that the big Greece bailout is about supplying liquidity to Europe is completely false and simply a ruse.

The dollar swap is there to supply more liquidity for the US market which as evidence by Thursday is as dry as an 80 year old woman.

The path for the up stockmarket has been the direct correlation with the Euro/Dollar rate and the SPX.  Euro goes down, market goes down.  Euro goes up, market goes up.  This is all about floating the stock market, not saving Greece.  Watch the hand.  Not what is coming out of the sleeve.

[Invisible Hand]

I have always been an cautious investor.  No huge gains in 1999 or 2007.  No huge losses either in the aftermath.  Made all the 2008losses back (plus a little) in HY in 2009.  Sold out (too early).  Virtually 100% in cash now, meaning 2yr or less bonds and CD's (except small short positions and some miners & PM).

Don't think I will ever buy stocks again (except special circumstances like miners--maybe pipelines and energy).

The market is completely stacked against even medium-sized investors (such as myself).  Always was but 20 years ago it was 2:1 to the house and now its 1000:1.

Hate to say it but if I ever go back into equities it will be overseas.  Investing capital in US, in the past, meant you had market risk.  Overseas it was market and political risk.  Now the US is just another banana republic, without the bananas.