Mixed Sentiments Dominate, as S&P Warns Europe of Possible Debt Downgrade in Cautious Trading

Mixed feelings dominated financial markets on Tuesday amid the lack of economic data from the United States, as fears continued to dominate global financial markets over the outlook of the European debt crisis after rating agency Standard & Poor’s announced it could downgrade the credit rating of 15 euro zone countries including Germany and France. Standard & Poor’s also signaled it could downgrade the credit rating of the European Financial Stability Facility EFSF.

Nonetheless, better than expected factory orders from Germany provided some hope for investors, where factory orders increased by 5.2% in October, better than median estimates of 1.0%, while compared with a year earlier, factory orders increased by 5.4%, also better than median estimates of 1.9%. Moreover, GDP data from the euro zone for the third quarter came in line with median estimates.

Meanwhile, the Bank of Canada left the benchmark interest rates unchanged at 1.00% in line with median estimates, where the BOC signaled that the European debt crisis could weigh down on global economic growth. Nonetheless, the BOC signaled that rising economic activities in the United States represent a good sign for the outlook, since the United States is indeed Canada’s largest trading partner. Canada also released the Ivey PMI for November, which rose to 59.9, better than median estimates of 55.5.

The U.S. dollar fell slightly against a basket of major currencies on Tuesday, where the U.S. dollar index was trading at 78.62, compared with the opening level at 78.71. The Euro was little changed against the Dollar, where the EUR/USD pair traded at $1.3383, compared with the opening level at $1.3386, the British Pound also fell against the Dollar, where the GBP/USD pair traded around $1.5601, compared with the opening level at $1.5642, and the U.S. dollar fell slightly against the Japanese Yen, where the USD/JPY pair was trading around 77.75, compared with the opening level at 77.80.

Stocks in the United States were mixed by opening on Tuesday, as the Dow Jones Industrial Average was up by nearly 0.25% to trade around 12,129, while the S&P 500 index was down by nearly 0.05% to trade around 1256. European stock indexes were also mixed before closing on Tuesday, where FTSE 100 was higher by nearly 0.20% to trade at 5579 and the DAX was down by nearly 1% to close around 6043.

Gold prices remained under pressure and dropped to trade now around $1709 an ounce and crude oil prices were little changed to trade around $100 a barrel.

EUR/USD Forecast Dec. 07, 2011, Fundamental Analysis

The EUR/USD fluctuated heavily on Tuesday after S&P issued a new warning for the eurozone members and placed 15 nations under review with a threat of downgrades that might eventually lead to an EFSF downgrade.

Standard & Poor’s was the highlight of the day after the late surprise on Monday that continued into Tuesday with warnings that if the European leaders again fail to produce something solid this week the rating could be cut as soon as that. The agency also placed the top six and grantors of the EFSF under review the triple-A rated Germany, France, The Netherlands, Austria, Finland and Luxembourg could take a hit with one notch downgrade as it said on Monday and followed the warning with another on Tuesday saying the EFSF long term credit rating could be downgraded if the euro zone nations are downgraded and will take the lowest grate of the mentioned grantors.

This is renewed pressure on the market sentiment and on the euro which eased the hope for the summit ahead and increased the risk of its failure as it will further complicate the crisis once the major economies are downgraded and if the EFSF loses its top notch rating!

On Wednesday the anxiety will increase for sure with the eyes on the ECB on Thursday ahead of the summit and investors are really anxious to see what the final decision from Europe will be, are they going to make it or break it once and for all this time.

Germany will start the session at 11:00 GMT with the Industrial Production index for October, where the non-seasonally adjusted annual index is projected to expand by 3.2% from 5.4%, while the seasonally adjusted monthly index could have expanded by 0.3% from the previous drop of 2.7%.

The United States will join the session at 20:00 GMT with the Consumer Credit figure for October, which could have declined to $7.000 billion from $7.386 billion.

Risk Aversion on S&P’s Downgrade Warnings to Europe

Pessimism was seen across the broad markets today after Standard & Poor’s warned it might downgrade 15 European nations including Germany and France, spreading concerns in markets and boosting demand for lower yielding assets.

If European leaders will fail to decide on a credible plan during Friday’s summit that would solve the region’s debt crisis, six nations might lose their AAA credit ratings, spreading pessimism over the outlook of the European economy.

This ended the rally seen since last week in the global equity markets, as risk aversion increased demand on safe haven. Investors must be cautious over the coming period ahead of the ECB meeting and the EU summit later this week.

As uncertainty continues to surround the outlook of the European debt crisis the Australian central bank cut its interest rate by 25 basis points to 4.25% to sustain growth, signaling that Europe’s efforts to end the debt crisis are still not enough.

We expect markets to remain under pressure since more pessimism might be spread among traders ahead of the ECB’s meeting and EU’s summit. US lack the economic data today. While in Europe the GDP was unrevised at 0.2% in Q3.

In Asia stocks fell as the regions is facing “much greater downside risks”, and Nikkei 225 ended lower 1.39%, while Hang Seng closed 1.24% down. InEurope, FTSE 100 fell 0.23% while DAX fell 1.09%.

The euro is trading with some bearish momentum around the 1.3390 level, while the pound is hovering around the 1.5650 as of this writing. The USD is almost unchanged around the 78.55 level. The yen is rising trading around 77.65.

Oil is almost unchanged trading around $100.88 on the euro zone downgrade risks, while gold is trading around $1719.50. The AUD fell today trading around 1.0225 after the RBA lowered rates to 4.25%.

EUR/USD Forecast Dec. 6th, 2011, Technical Analysis

The EUR/USD pair initially had a very positive day during the Monday session as the markets reacted positively to the meeting between Sarkozy and Merkel. The meeting was successful in producing an overall concept of a fiscal union, and would be presented at the EU summit on Friday. The consensus was that this is the first real step towards a solution.

However, during the American afternoon, the entire 15 nations in the Euro currency have been rumored to be put on credit downgrade watch from the ratings agency S&P. The fact that the agency neither confirmed nor denied this is particularly troubling.

Looking at the charts, the 1.35 level still seems to be massive resistance as the day fell just short of breaking it yet again. This is the fourth day in a row where the currency pair attempted to break the level, so the ferocity is well noted. The breaking of that level would be a massively bullish signal, and at that point we would have to be long this pair.

For the downside, we still see the 1.31 level as an area that should continue to put up a fight for the bulls. The selling down to that level looks ready to happen, as the daily candle for Monday looks like another shooting star in this pair, and the next move could very easily be down. The breaking of the lows on Monday would have us selling.

The pair will continue to be choppy at best, and quite frankly – one of the more dangerous ones to be bothered with. The headline risk is simply far too great in both directions at this point. With this in mind, we are looking for further weakness, but in a choppy manner. We see 1.31 as the floor currently, and would be quick to take profits if we approach that level. The trend is down, and we think that it will continue to fall every time it rises. Selling the rallies in the short-term has been the way to go, and we think it shall continue to be.

EUR/USD Forecast Dec. 6th, 2011, Technical Analysis EUR/USD Forecast Dec. 6th, 2011, Technical Analysis

Markets Tumble As Standard & Poor’s Issues Warning

Monday morning, the markets opened with good intentions. The weekend had brought positive progress from the French and German leaders. Monday’s meeting brought good news. The euro, which was predicted to fall after the Friday speeches from Merkel and Sarkozy showed huge disparity in their views for a future eurozone and they were far apart on agreements for a new EU treaty. On Monday morning, Italy’s new Prime Minister Monti, unveiled Italy’s tough austerity plans. Ireland’s leader made a public speech outlining Ireland’s plans to get their finances and debt under control. Greece continued to improve and bond yields were dropping.

The euro, spent most of the day in positive territory. All exchanges and markets in Europe moving upwards.

On Friday the only good news was the US employment drop to 8.6%, not a great number, but compared to the 9.0% that had been reported most of the year, this was good news.

Investors over the weekend, would have bet that Mondays markets would have

EUROPEAN MARKETS DOWN

US MARKET UP

USD STRONG

EUR WEAK

What we ended up with at the close on Monday of US markets

EUROPEAN MARKETS SOARED UP AND CLOSED DOWN

US MARKETS OPEN UP AND THEN DROP DOWN

USD OPENED DOWN AND THEN CLOSED UP

EUR OPENED UP AND CLOSED DOWN

 

What caused this to happen?

Investors are worn to the brink, they are no longer making smart investments, their nerves are frayed and they are reacting to each piece of news. As it drives markets up and down.

Ratings agency Standard & Poor’s warned it might downgrade euro zone countries en masse if European leaders fail to produce a credible plan to solve the region’s debt crisis at a summit later this week.

The unprecedented warning brought to a halt a rally in global equities on Monday, when the leaders of France and Germany agreed a plan aimed at guiding the region out of its two-year-old crisis. S&P said it had told 15 of the 17 euro zone countries, including Germany, France and four others with the top AAA credit rating, that it might downgrade them within 90 days, depending on the outcome of Friday’s summit.

The warning took the sheen off a Franco-German agreement, to be put to other member states on Friday, to impose budget discipline across the currency area through European Union treaty changes.

 

What effect can this have?

Many pension funds mandates of triple-A rated holdings will be forced to sell government issues, which could trigger a surge in yields as prices plummet.

Funds that will be required to divest of non-AAA investments are few and does not expect a huge impact in the market from such sell-offs.

On Monday also federal regulators approved tougher rules on Wall Street risk-taking on adopting the MF Global rule, named after the collapsed brokerage firm that is believed to have improperly used millions of dollars of customer money.

The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers.

EU Optimism Boosts Demand for Higher Yielding Assets, as USD Falls against Major Currencies

A wave of optimism dominated global financial markets on Monday, where traders were already encouraged by the unexpected drop in U.S. unemployment reported last Friday, while optimism that EU leaders could be able to reach a resolution to the debt crisis in Europe, boosted confidence in markets and supported demand for higher yielding assets, as the U.S. dollar fell against major currencies, while equities, commodities, and major currencies rallied.

Investors are optimistic that EU leaders could reach a plan to ease the euro zone debt crisis at this week’s EU summit, while the ECB is expected to loosen its monetary policy as well in order to help in easing the deepening debt crisis. Moreover, reports signaled that Germany and France have reached an agreement on reforms to solve the debt crisis and prevent another situation in the future, which also supported confidence in markets.

Nonetheless, the U.S. ISM services index signaled that activities in the services sector eased in November below projections, where the ISM services index eased to 52.0, compared with the prior estimate of 52.9 and below median estimates of 53.9. Nevertheless, investors were focused on the developments in Europe, which overshadowed the worse than expected ISM services index.

The U.S. dollar fell sharply against a basket of major currencies on Monday, where the U.S. dollar index was trading at 78.23, compared with the opening level at 78.61. The Euro gained against the Dollar, where the EUR/USD pair traded at $1.3459, compared with the opening level at $1.3416, the British Pound gained strongly against the Dollar, where the GBP/USD pair traded around $1.5699 compared with the opening level at $1.5605, and the U.S. dollar fell against the Japanese Yen, where the USD/JPY pair was trading around 77.82, compared with the opening level at 78.09.

Stocks in the United States rallied by opening on Monday, as the Dow Jones Industrial Average was up by nearly 1.20% to trade around 12,165, while the S&P 500 index was up by nearly 1.60% to trade around 1264. European stock indexes were also higher before closing on Monday, where FTSE 100 was higher by nearly 0.45% to trade at 5577 and the DAX was up by nearly 0.60% to close around 6116.

Gold prices fell to trade now around $1740 an ounce and crude oil prices gained to trade around $101-$102 a barrel.

EUR/USD Forecast Dec. 06, 2011, Fundamental Analysis

The EUR/USD started an upbeat week on Monday with the eyes all concentrated on what lays ahead in the week from the ECB and EU summit which are both expected to deliver good outcomes and support to stem the crisis where the new austerity package from Italy and Merkel and Sakozy’s agreement on a new plan bolstered the confidence.

The week started after the Italian government approved a 30 billion euro austerity and growth package and Monti on Monday presented the package to both houses of Parliament for approval which supported the sentiment that Italy is doing its homework to escape the crisis that sent its borrowing costs to records high.

As for Merkel and Sarkozy they said they have reached agreement on the plan to help end the crisis and on the fiscal integration that is hoped to be for all the EU and still open to be for the euro area which will see strict oversight over the breach of fiscal rules in the Stability and Growth Pact which they will present to the European Commission President this week and they will surely address the EU with it in Brussels.

Hopes that Europe is moving towards bigger steps to stem the crisis and the use of greater tools like the IMF this week is helping ease the tension and supporting the return of the risk appetite in the market. We still expect this sentiment to pickup pace this week and gains to be seen still for the euro unless they disappoint again which will surely trigger a massive selloff to the end of the week.

As for the data on Tuesday, the euro zone will start the session at 10:00 GMT with the GDP figures for the third quarter in a preliminary reading, where the quarterly and annual seasonally adjusted indexes could have lingered at 0.2% and 1.4% respectively, noting that the Household Consumption index previous reading was 0.2% drop, while the Gross Fixed Capital was at 0.2%, in the time Government Expenditures dropped by 0.2% previously.

Germany will join the session at 11:00 GMT with the Factory Orders index for October, where the annual non-seasonally adjusted index could have expanded by 1.8% compared with the previous expansion of 2.4%, while the monthly seasonally adjusted index is predicted to expand by 1.0% from the previous drop of 4.3%.

Confidence Boosted by Italy’s Austerity program

A slight wave of optimism was seen across the broad markets, as Italy’s Prime Minister Mario Monti will unveil today a 30 billion euro package of austerity measures to parliament, boosting confidence ahead of the European Summit later this week.

Investors targeted higher yielding assets as European leaders extend their efforts to solve the debt crisis that threatens the euro unity, where French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet today in Paris to overcome their differences till Friday’s summit.

Confidence is also boosted by the improved outlook for the U.S .economy after the jobs report last week showed unemployment dropped unexpectedly to 8.6%, while the ECB is expected to cut rates this week  to help ease the mounting tensions from the debt crisis.

Investors will continue to focus on the new developments from Europe this week, since strong resolutions that would end the debt crisis are more than welcomed. Italy’s austerity program brought gains in Asia and Europe today, where Nikkei 225 ended higher by 0.60%, while DAX rose 0.87% as of this writing.

Today’s’ economic data however was not that cheerful, since in China the services PMI fell to 52.5 in Nov., the weakest growth in three months, confirming that the economy is slowing quickly. In Germany and EU the services PMI also fell below expectations, while in the US the ISM services may rise to 53.8 in Nov.

The euro is trading with bullish momentum around the 1.3444 level as of this writing. The pound gained today after UK reported a better than expected PMI services report, where the currency is trading around 1.5630. The AUD is trading with some bullish momentum too around the 1.0254 level.

As investors felt some appetite for risk, the safe haven USD is weakening, trading around the 78.40 level as of this writing. The Yen is trading around the 77.95 level, while the commodities are almost unchanged, where oil is trading around $101.75 per barrel, while gold is trading around $1744.50 per ounce.

It’s All In The Numbers

Is this the equation to save the Euro or to for the destruction of the Eurozone ?

 (Greece + Itay + Spain) + (Ireland + Portugal + Belgium )/ Germany + France =ECB + IMF (Russia + China + Mexico + USA) 

With the prospect of defaults by Greece, and the more remote potential of losses on debt from Italy, Spain, Portugal and Ireland, the banks will deplete the capital they have and will need to raise more. Italy’s debt is the largest, at about 1.8 trillion euros ($2.6 trillion) is five times larger than what Greece owes.

The last issue is how much money should be added to the existing European Financial Stability Facility, which would provide backup borrowing authority to support eurozone countries. There is broad agreement that the existing 440 billion euro fund is too small.

Greece’s creditors may be forced to write off as much as 60% of its 329 billion-euro ($458 billion) debt.

Across the continent, Ireland’s Brian Lenihan’s presented the 2011 Budget this past week; he stated that there will be budget deficit of €17.7bn and public debt/GDP ratio at 99% plus economic output. The Irish government is going to begin a period of “austerity” to try to handle this deficit internally after having already taken a bailout from the EU.

It’s All In The Numbers

 

Irish Debt

Back to Europe, Belguim’s bond yields have soars on their banking problems. There is a possibility that they may be facing some difficult times.

 

Dexia, a bank specializing in local government financing, has had its Belgian arm bought by the country’s government, with Belgium, France and Luxembourg in a €90bn guarantee. It’s the first lender to fall victim to the eurozone crisis

European officials began scrambling to find ways to lend financial aid to Portugal on Thursday after the debt-ridden Iberian nation bowed to market pressure and decided it had no choice but to ask for help.

Raising taxes and selling stakes in some of the country’s biggest companies to comply with the terms of the 78 billion-euro ($105 billion) aid package.

The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro- era record of 10.78 percentage points on July 12 and was at 10.23 points yesterday, double the 5.11 points when former Prime Minister Jose Socrates sought the rescue on April 6.

The 10-year bond yield was at 12.03 percent up from 10.14 percent at the start of this month amid concern among investors about contagion from a potential Greek default.

The question is just how much can the EU afford, how much can the EU raise or leverage, conservative estimate estimates are place at 1.3 trillion dollars with leverage. The IMF emergency funds are below 400 billion euros. How much will Germany and France absorb? How will they survive if their borrowing rates soar?

Can Sarkozy and Merkel, reach an agreement this week with EU leaders and the ECB and the IMF. December 9th is D-day.

Cultural Differences Between France and Germany

The European Union is an amazing attempt at merge many governments and economies that are not only seperated by religion, politics and social reforms, but also by cultural differnces. All 17 members of the Euro agree there are major economic and political pressures facing each individual government. They all agree that radical changes need to be instituted. They all agree that they need to help the countries facing economic problems. They all agree that each country should maintain independence. They all agree that they need to work together for the common good. They all agree that government debt must be lowered, government services need to be move to private sectors. They all agree they need to be competitive in the global markets.

What they can not agree on is how ?

The problems facing the EU is as old as the problems in the middle east. The cultural differences, the way the people think and the way they deal with issues.

Split Decision

Germany and France still divided on healing euro woes

Merkel

Wants automatic sanctions against budget sinners

  • Rejects issuing euro bonds to help alleviate crisis

Sarkozy

  • Grudgingly accepts ‘more automatic’ sanctions
  • Favors issuing euro bonds to protect market access

The Arabs and the Nomads, the Christians and the Jews, the Islamics and the Secular have been fighting for years, the reason that peace is not easily obtainable is because they view the problems and the solutions differently because of their culture and history. Palestine and Israel will most never find peace, not because the people actually hate each other, not because the sides want war and not because of land, it is their cultural difference, it is their viewpoint and their perspective that is different.

This has become very evident recently in the battle between President Sakozy and Chancellor Merkel. They can ageed on the problems, they can agree on the solutions, but when it comes to the fine points and the decisions, they bump heads.

Surrendering sovereign powers, including the Parliament’s mastery of the budget process, would amount to a risky political gamble for Mr. Sarkozy five months ahead of France’s presidential election next spring. For its part, France has insisted that deeper integration also should yield increased solidarity.

The chancellor wants to focus on what she sees as the root causes of the crisis by creating a long-term regime of fiscal discipline, while changing the European Union’s treaty to give European authorities new powers of enforcement.

In a speech to Germany’s parliament on Friday, she warned that euro members would have to accept a loss of national sovereignty, and that there is no quick fix to the crisis.

In the past week, we have heard from the President of the ECB, from the Director of the IMF, from Chairman of the Bank of England. Everyone is prepared to assist to find solutions and offer assistance. The IMF was able to get pledges from most of the G20 nations. China has decided to assist the IMF. Central Banks from around the globe joined forces this week to aid the EU banks to maintain liquidity until the December 9the EU summit.

Towards the end of the week, there was rumor and announcements, statements and press that Merkel and Sarkozy were able to find a path. David Cameron from the UK met with the leaders on Friday and insisted that they find a way to resolve the EU debt crisis. And to discuss the possiblitly of rewriting the EU treaty that covers each country as a member of the EU. Mr. Cameron was there to represent the UK and other nations that are part of the EU but are not part of euro currency, to make sure they were not pushed to second place. There are pressures on the EU from all directions.

But the most powerful leaders of the EU are still at odds. On Friday Chancellor Merkels speech and the statements from President Sarkozy seemed to take almost opposite positions.

On Monday the markets will react to this new uncertainty. Markets soared from midweek on the news of agreements, understanding and road-maps. But it seems that the news was premature, as the IMF and the ECB can not act without the EU.

This is plan number 12.. its their last chance to get things right.

 

 

EUR/USD Forecast for the Week of December 5, 2011, Technical Analysis

EUR/USD had a bullish week, but gave up a significant chunk of those earnings on Friday. The resulting candle looks like a shooting star at the end of the recent plunge in prices, and signals that we might struggle to maintain higher prices. The breaking of the bottom of the week’s range would be a very bearish signal, and would attract more sellers at this point. The buying of this pair will be almost impossible as the headline risks are numerous out of the EU right now. With the Germany – France meeting on Monday and the EU summit on Friday, there should be plenty of disappointment for all involved. We like selling rallies still as long as we are under the 1.36 handle.

EUR/USD Forecast for the Week of December 5, 2011, Technical Analysis EUR/USD Forecast for the Week of December 5, 2011, Technical Analysis

EUR/USD Forecast December 5, 2011, Technical Analysis

EUR/USD rose initially on Friday as optimism gripped the markets once again. However, the 1.35 level has proven that it will attract sellers as the pair approaches it, and the candle was red at the end of the session. The outside reversal candle is an ominous sign, and the EU has a couple of meetings this coming week that could spook this market. The breaking of the bottom of the Friday range would have us selling again. The pair isn’t one we buy under any circumstances as the headline risk in the EU are simply too strong at this point.

EUR/USD Forecast December 5, 2011, Technical Analysis EUR/USD Forecast December 5, 2011, Technical Analysis

EUR/USD Weekly Forecast December 5-9, 2011, Fundamental Analysis

The EUR/USD pair ended a strongly bullish week, affected by the sudden intervention from the European Central Bank and the Federal Reserve in cooperation with other Central Banks, where the policy makers agreed to lower the cost of borrowing U.S. dollars in order to support European Banks that are facing dollar-liquidity issues and also to prevent a credit crunch from occurring in the European Financial system.

Optimism spread further in the market after European finance ministers agreed to hand Greece and Ireland the next tranches of the last bailout packages, which quelled jitters that Greece will not default early as expected before, where Greece will run out of funds probably in January without this financial aid.

Germany also supported the sentiment to improve this week, where the nation has finally agreed to boost the International Monetary Fund (IMF) role in fighting the two-year debt crisis, especially when the European Central Bank (ECB) mandate prevents it from involving directly in any bailouts for countries neither to act as a last resort.

The United Kingdom also shared the positivity with other nations, where the country explained that any changes in the European Union Treaty will be acceptable in case these changes can help in tackling the debt crisis, especially when the United Kingdom is affected sharply by the recessionary threats spreading from the euro zone, which is the United Kingdom’s largest trading partner.

In addition, the United States, the world’s largest economy, also added positivity to the market with the flow of upbeat fundamentals this week, where th U.S. unemployment for example retreated to 8.6% from 9.0% this month, while manufacturing sector improved to 52.7 from the previous 50.8, in the time consumer confidence improved to 56.0 from 40.9.

The volatility will continue for the pair this week with the eyes focused still on the euro area, especially with the lack of major data from the United States.

This week the ECB is expected to cut rate for the second time in as many months by 25 bp back to the record low of 1.0% and Draghi is likely to announce further support to the market and the economy by longer maturity tenders and credit lines to ease the strain from the debt crisis.

The second most important entry on our agenda this week will be the EU summit to the end of the week. The leaders will discuss the treaty change as Germany and France push for tighter fiscal consolidation and coordination to ensure the strength of the union while also they will finalize the details of the EFSF with the possibility of discussing the IMF as the source for funding and likely shy from direct remarks on the ECB role to ensure its independence.

They might call for cooperated efforts to expand the IMF firepower via bilateral lines and SDR from regional central banks after Germany reflected its eased objection to the matter and that will be surely the needed highlight for the week and for the coming period as Europe exhausted all its chances and we hope they seize this one and not only show us they did and to end up as only buying more time like the last summit!

Other news from the euro area and the U.S. economy to affect the pair this week:

Monday December 5:

Germany will start this week at 08:55 GMT with the PMI Services for November in a final reading, where the index is expected unrevised at 51.4.

The euro zone will join the session at 09:00 GMT with the PMI Composite and Service for November in a final reading, where the PMI Composite and Services are expected unrevised at 47.2 and 47.8 respectively.

At 10:00 GMT the euro zone will release the Retail Sales index for October, with expectations the monthly index could have expanded by 0.1% from the previous drop of 0.7%, while the annual index is projected to drop by 0.6% compared with the prior drop of 1.5%.

At 15:00 GMT the United States will join the session with the ISM Non-Manufacturing Composite for November, which could have improved to 53.5 from 52.9.

The United States will also provide markets with the Factory Orders index for December, with expectations that the index could have shrank 0.3% from the prior 0.3% expansion.

Tuesday December 6:

The euro zone will start the session at 10:00 GMT with the GDP figures for the third quarter in a preliminary reading, where the quarterly and annual seasonally adjusted indexes could have lingered at 0.2% and 1.4% respectively, noting that the Household Consumption index previous reading was 0.2% drop, while the Gross Fixed Capital was at 0.2%, in the time Government Expenditures dropped by 0.2% previously.

Germany will join the session at 11:00 GMT with the Factory Orders index for October, where the annual non-seasonally adjusted index could have expanded by 1.8% compared with the previous expansion of 2.4%, while the monthly seasonally adjusted index is predicted to expand by 1.0% from the previous drop of 4.3%.

Wednesday December 7:

Germany will start the session at 11:00 GMT with the Industrial Production index for October, where the non-seasonally adjusted annual index is projected to expand by 3.2% from 5.4%, while the seasonally adjusted monthly index could have expanded by 0.3% from the previous drop of 2.7%.

The United States will join the session at 20:00 GMT with the Consumer Credit figure for October, which could have declined to $7.000 billion from $7.386 billion.

Thursday December 8:

The European Central Bank will start the session with the Interest Rates Decision for December, with expectation the Governing Council could have lowered the key rate to 1.00% from 1.25%.

The United State swill join the session at 13:30 GMT with the Initial Jobless Claims (DEC 2), noting that the previous figure was 402 thousand claims.

At 15:00 GMT the United States will provide markets with the Wholesale Inventories for October, which could have expanded by 0.4% from the prior drop of 0.1%.

Friday December 9:

Germany will start the session at 07:00 GMT with the Trade Balance figures for October, where the Trade surplus is expected to narrow to 15.0 Billion euros compared with the previous of 17.4 billions, as Exports are expected to drop by 1.0% from the previous 0.9% expansion, while Imports are expected to expand by 0.1% from the prior 0.8% drop.

The German Current Account could have narrowed to 14.0 billion euros from 15.7 billion.

Germany will also released the consumer price index for November in a final reading, where the annual and monthly CPI indexes are expected unrevised at 2.4% and 0.0% respectively, while the Harmonised CPI annual and monthly indexes are expected to remain unchanged at 2.8% and 0.0% respectively.

The United States will join the session at 13:30 GMT with the Trade Balance figures for October, which could have narrowed slightly to $13.0 billion from $13.1 billions.

At 14:55 GMT the United States will end the week with the University of Michigan Confidence figure for December in a preliminary reading, where the confidence is expected higher at 65.5 compared with the prior of 64.1.

**European Leaders Summit**

EUR/USD Forecast Dec. 05, 2011, Fundamental Analysis

The EUR/USD is embracing for another critical week as it has been the case for the past period, and this time the summit for the EU leaders is indeed the last chance to restore order and embrace the mild recession calmly.

The focus will start from Monday on the EU summit and the ECB rate decision with more expected from both sides and surely the start will be with cautious and jitters as investors look atParisfor details from Merkel and Sarkozy over what to expect from the EU.

We still expect volatility and choppy trading especially after a good run for the pair last week and a relief rally that maybe only prepared the grounds for further losses. The euro’s recovery can persist but only depends on what the end of the week will present from the ECB and the EU and accordingly the uncertainty will linger in choppy trading.

Germanywill start this week at 08:55 GMT with the PMI Services for November in a final reading, where the index is expected unrevised at 51.4.

The euro zone will join the session at 09:00 GMT with the PMI Composite and Service for November in a final reading, where the PMI Composite and Services are expected unrevised at 47.2 and 47.8 respectively.

At 10:00 GMT the euro zone will release the Retail Sales index for October, with expectations the monthly index could have expanded by 0.1% from the previous drop of 0.7%, while the annual index is projected to drop by 0.6% compared with the prior drop of 1.5%.

At 15:00 GMT theUnited Stateswill join the session with the ISM Non-Manufacturing Composite for November, which could have improved to 53.5 from 52.9.

TheUnited Stateswill also provide markets with the Factory Orders index for December, with expectations that the index could have shrank 0.3% from the prior 0.3% expansion.

A BIT OF A PLAN FROM THE ECB… but not the ROADMAP that was PROMISED

A week or so ago European Central Bank President Mario Draghi, assured the world that he would have a “roadmap” prepared and ready to present at the December 9th meeting of the EU. Yesterday, Draghi, began to release some of the details to assure the markets and the politicians that the ECB was taking positive action to resolve the issues facing Europe. Yesterday, simultaneously David Cameron was meeting with Sarkozy and Merkel, to pressure them on several matters. One was to reiterate the need for decisions and guidance, no more talks and meetings. He also stressed the need for austerity measures; just bailing out countries would not help Europe. Good budgeting and good finances are required. Cameron also was in serious talks regarding new policies and requirements that the EU would be placing on member states. Cameron wants to make sure that the UK is not given a second seat to France and Germany.

The Central Bank President only assumed his role last month and this is his first appearance and public statement. He called on euro-zone governments to quickly craft a “new fiscal compact,” calling it “the most important element to start restoring credibility.” He added that “other elements might follow, but the sequencing matters.”

“There cannot be a single currency without economic convergence,” he said in the southern French city of Toulon. “Or the euro zone will explode.”

Mario has come intense pressure from politicians to commit to massive purchases of government bonds in order to stabilize yields and give governments time to enact convincing deficit reduction. The ECB bond purchases can bring down countries’ borrowing costs, making it easier for governments to refinance debt.

The European Central Bank so far has resisted the pressure, keeping purchases in the €5 billion to €10 billion ($6.7 billion to $13.4 billion) range each week. This has been enough to keep the borrowing costs of Italy and others from spiraling out of control. Bond yields in country after country, not only the debt-plagued nations on Europe’s southern periphery, have been hitting.

Mr. Draghi stopped short of promising unlimited purchases of euro-zone bonds, as a number of European policy makers have recently demanded, but his comments nevertheless raised the prospect that the ECB is willing to do significantly more.

France and Germany, and euro-zone nations are working on new rules that would make budget discipline binding and enforceable by European authorities—possibly shortcutting the laborious and uncertain process of amending existing treaties. ECB officials welcomed the emergence of such a plan over the weekend, saying it would address “moral hazard” concerns.

Despite Mr. Sarkozy’s statements Thursday, there is still disagreement on how far to go—including between him and Chancellor Merkel. Economists said Mr. Sarkozy’s specific proposals may fall short of Germany’s demands for full fiscal submission to a euro-zone budget supervisor.

EUR/USD Forecast Dec. 2nd, 2011, Technical Analysis

EUR/USD had a positive day on Thursday as traders continue to see potential movement in the crisis by leaders of the EU. The pair again struggled with the 1.35 level as resistive, and the pair looks a little heavy at this point. The daily candle is a shooting star, and looks very bearish. However, the breaking of the bottom needs to happen in order to confirm a sell signal. Also, one has to be aware of the Non-Farm Payroll announcement later today, and that the announcement can move the market in very unpredictable ways.

EUR/USD Forecast Dec. 2nd, 2011, Technical Analysis EUR/USD Forecast Dec. 2nd, 2011, Technical Analysis

EUR USD Mid-Week Analysis for the Week of November 28, 2011

Mid-Week EUR USD Analysis

The EUR USD started out the week sharply higher after a story broke over the week-end that threw enough optimism into the market to encourage short-traders to lighten up their positions. Going home Friday, one would have thought the market was poised to take out the early October bottom at 1.3145. This would have triggered additional selling pressure with the low for the year at 1.2873 the next likely target. Instead, short-traders used the excuse of the breaking news and oversold conditions to take profits and wait for another opportunity to short at higher prices.

The subsequent 2-day rally stopped short of squaring price and time on a down trending Gann angle at 1.3447. The high for the week is 1.3441. This was close enough to conclude that traders are respecting this angle as solid resistance. As long as this angle can hold as resistance, the market will remain week. Taking out this angle will likely lead to more short-covering and the possibility of a rally into the retracement zone at 1.3729 to 1.3852. This is not likely to happen overnight unless the entire Euro Zone sovereign debt is solved. Therefore, counter-trend traders will have a chance to take advantage of it if offered the opportunity.

The big news driving the market higher is the rumor of a proposal to speed up the integration of the European Union’s new fiscal policies. The plan includes creating treaties between individual countries rather than create changes to the entire EU treaty. This will accelerate the process in which European leaders gain new powers to enforce fiscal discipline or financial austerity measures.

According to the agreement EU members are allowed to engage in “enhanced cooperation”. A change in the normal process will allow Euro Zone members to make treaties with other members, eliminating the process of having all of the members of the Euro Zone approve changes to the treaty. The pact could be announced before the EU summit on December 9 which is the primary reason for this week’s short-covering rally. Rather than take the chance that the proposal will gain footing, short-sellers decide to err on the side of caution ahead of the possible announcement.

At this time, traders are looking for anything that will stem the crisis of confidence taking place in the financial markets. It may only be a short-term fix, but anything is better than the inactivity that has taken place by the EU leaders since announcing their 3-point plan in October to solidify the finances of the Euro Zone.

Other factors affecting the Euro this week include the on-going process of buying Italian debt. Despite its best efforts, the European Central Bank has been unable to stop the rise in interest rates. On Tuesday, the 3-year yield reached a Euro era high of 7.89%. This is dangerously close to the psychologically important 8.00% level. The fact that the ECB cannot gain control of the interest rate rise suggests that Italy may be a lost cause.

Late Tuesday the Euro sold off when it was announced that the ECB failed to cover its purchases in the open market, creating somewhat of a liquidity issue. Some analysts called it a form of quantitative easing because excess Euros were floating around in the system. Also affecting the Euro this week are the persistent rumors that France is going to get its debt rating cut. This has been talked about for several weeks, but the story is beginning to gain traction. Even though the market has been warned, this news could be disastrous for the Euro.

Although the ECB has been working hard to stem the flow of sovereign debt with its bond purchases, the call for greater intervention at this time couldn’t be greater. The pressure seems to be on the central bank to act more aggressively and with more conviction, but as long as its mandate is to control inflation, it is not going to risk violating this mandate. Herein lies the main problem. No one seems to want to take control of or at least offer even a short-term manageable solution to the expanding debt issue.

Factors Affecting the Euro this Week:

  • Economic News:  Economic news has been ignored this week since the focus has been on the Euro Zone debt crisis. Stealing the headlines have been talk of short-term proposals, the Italian auction and rumors of a France debt rating downgrade. This scenario is likely to continue until the European summit. The U.S. Non-Farm Payrolls report may have an influence on the EUR USD on Friday, but the number would have to substantially miss the pre-report guesses.
  • Yields:  Traders should keep an eye on the Italian yields. They continue to rise despite the ECB’s best efforts to support the auctions. It seems that interest rates are getting closer to spiking higher. There doesn’t seem to be a let up in rates at this time.

Convergence – Divergence and Insurgents

Christine Lagarde, President of the IMF, indicated yesterday that the G-20 countries we willing to come to the aid of the EU to increase the funding to the IMF. Currently, the IMF has 390 billion euros available in their emergency fund, which would most likely not be enough to assist the ailing economies of EU regardless of the leveraging power of the EFSF. Lagarde, indicated that the BRIC nations, which are made up of Brazil, Russia, India and China were willing to increase their funding to the IMF. The BRIC nations have been updated to become BRICS, which now includes South Africa. Lagarde, also noted that Latin America, specifically Mexico were also willing to increase funds. Lagarde, did not indicate the amounts promised or discussed. She is currently in meeting throughout South America. This is the first mention during the turmoil of aid from Russia.

While Lagarde, is pushing the G20 and the IMF to develop plans to assist Europe. The Europe leaders met with their counterpart from England yesterday, where David Cameron told the EU leaders that it was time for some direct action and final commitment and plans.

At the same time that Cameron was meeting with Sarkozy and Merkel, BoE director King, was admonishing UK bankers, to increase capital and to reduce their bonuses. King is trying to keep a tight rein on the bankers.

Recently, economists and financial experts as well as investors have been reviewing the tentative plans for the EFSF, and many have drawn the conclusion that although these European Bonds will help raise the funds necessary to assist the ailing economies of the EU, that the final effect will be an increase in borrowing costs for countries such as Germany and France who have low bond rates and will reduce the interest paid by countries such as Italy, Spain, and Greece. It will end up being a weighted average bond. This will help those with high borrowing rates but cause a damaging effect to those with strong economies. Investors have been playing the game, buying up high yield bonds in the hopes that they will not have to take a haircut and will have the bonds backed by the EU or the economies saved by the EU and therefore make huge profits.

The markets have adjusted to the reality that they were reacting to news and not improvements in business and economics. News can only sustain markets for a short period of time, between the Ups and Downs, but news alone cannot drive the markets without the achieving real economic improvement. This past week has demonstrated just how much rumor and news can move markets. The week started off with Black Friday, moved to Cyber Monday, moved to rumor Tuesday (IMF assistance to Italy) and continued on to Central Banks Coordinated Effort Wednesday. By Thursday, investors were exhausted and stressed from chasing markets and news. Markets retracted slightly, while they took the time to digest the week’s news.

Friday is still to play out.

The EU turns to the IMF

In a surprise turn around, EU finance ministers are turning to the IMF for assistance with the growing debt problems throughout the eurozone.

EU leaders have been meeting and are in discussion on how to use the European Financial Stability Facility. The massive amount of money needed to bail out Italy, Spain, Greece and possibly Belgium is a staggering sum which cannot be raised by the 17 eurozone countries without using leverage to extend the reach of the facility. This also exposes the EU to much larger losses and the fears that it might not be enough to stop the contagion or leave a cushion if other countries need bailouts. European leaders said the fund could be increased to as much as €1 trillion as a result of the leverage scheme, which involves partially insuring government bonds and creating special investment vehicles to attract capital from private sector investors.

Analysts say the amount is closer to €750 billion, since the EFSF has only about €250 billion that is not already earmarked. The International Monetary Fund which measures its funds in a basket of currencies and has about $390 billion to work with.

That compares with an estimated €2 trillion in funding needs for the most troubled euro area economies, including Italy and Spain.

Beyond the lack of sufficient funds, there are serious questions about how much risk the IMF would assume if it began intervening in the sovereign debt market.

Central Bank Directors and National Leaders all agree that a plan is necessary and not a bandage. The news keeps saying the plan has to be a bazooka otherwise the markets will crash.

The EU has been dragging this on for way to long and Investors are at their wits end. The next announcement needs to be a complete and all inclusive plan, without speculation and guestimates. The markets are looking for a complete roadmap, ready to roll out immediately.

The Central bank scheme announced yesterday is a stopgap measure designed to help for only a short term it is not a fix or a roadmap. The EU leaders have promised to have a complete plan ready for their December 9th meeting.

The question the markets are asking, is where the funds would come from to meet a need of 2 trillion dollars, even with support and assistance from the US, China and the UK, there is a shortfall and not enough money. Each country is facing their own economic and debt crisis and cannot offer all the assistance that maybe needed.

In the meantime the markets wait.

 

 

Markets Over React to the Central Bank Annoucement.

Strategists said Europe’s sovereign debt problems will continue to be the key driver for the euro. The EU and IMF must now do something positive to help the debt crisis and protect the euro.

Markets Over React to the Central Bank Annoucement.

The news today can be best interpreted from what investors and analysts are saying this morning.

“As Europe dithered, monetary policy makers acted, even if their ‘actions’ have more symbolism than significance,” said strategists at RBC Capital Markets. “Markets breathed a huge sigh of relief.”

Yesterdays move by the Central Banks signaled leadership and direction. This is what the markets are looking for. Investors jumped head first into the markets.

The move is an attempt to “ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the banks said in a statement.

“It’s the first time we’ve seen this type of global coordination since November 2008,” said Michael James, a senior equity trader at Wedbush Morgan. “The degree of coordination sends a message to the markets that global leaders are going to do whatever they need to do to instill confidence in the markets.”

“The fundamentals just keep marching forward despite the market turmoil,” said Doug Cote, chief investment strategist at ING. “The real economy seems indifferent to the EU debt headlines.”

Central banks are “hoping the rate is so attractive that hitting the swap line makes business sense as opposed to signalling vulnerability,” he said. “They hope if they draw enough institutions, the stigma will decline, stresses on the liquidity front will ease and that will ease some of the bearish demeanor towards the euro.”

“The price action was because the market was short, not being bought by people entering new long positions in euros and equities,” he said. “It’s people closing shorts.”

This morning’s coordinated action also implies that the central banks feel conditions are much worse than they would otherwise lead us to believe, which is why more liquidity is needed immediately,” said Kathy Lien, director of currency research at GFT. “The markets are always relieved to see central banks put up a unified front, especially on the heels of a similar increase in liquidity from China.”

Removing the risk of liquidity problems increasing further as year-end approaches provides a major relief to financial markets,” said Greg Anderson, senior currency strategist at CitiFX in New York.
“The level of cooperation and responsiveness being shown by the G7 central banks suggests that policy makers are now highly engaged and likely to come forward with further measures in coming days.”

“The big deal is just saying they are going to be involved. It’s not like they brought out the tank, they brought out the six shooter,” he said.

“It’s not enough. It’s a temporary liquidity initiative which is good, but it won’t solve the problem, because in a couple of days, the problems will put on their hats again,” De Leus said.