Market report 25th of July

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The inability to reach a debt ceiling agreement in the US before the weekend is weighing on risk this morning and gold made a new record high at 1620.84. S&P 500 futures are down 10.75 points (-0.75%) in Globex at the time of writing. The Swiss franc is outperforming big time and down below 1.16 again. In general, the well known correlations in risk off mode moving as expected this morning. The longer the US politicians use to get to an agreement the more nervous the market will get. Last week my feeling was the market was pricing in a solution in the US. I still think they will reach a conclusion, but the longer it takes the higher the risk is for an ugly scenario. My thinking is that Euro zone is far from saved. Since Greece cannot go to market and lend, they have to come back for more support at some stage. You also have potential debt problems in Span and Italy along with already support Ireland and Portugal. It becomes harder for Germany to accept these bail outs every time they happen, how many more can they take? Or do they actually have any other option?
The economic calendar this week is fairly light in the Euro zone. We have GDP from US and UK this week and inflation data from Australia (CPI Wednesday). The Reserve Bank of New Zealand meets on Thursday.
The S&P 500 future was not able to close the 1344.25 gap Friday and I think it will be very important technically what happens this week. We have failed in this region (1340 to 1362) three times already this year. We want to see increasing volume towards the key levels to be able to push through. An approach on decline volume is bearish in an up move and bullish in a down move.
EURUSD is trapped in debt literally, with problems on both sides of the Atlantic. Difficult to really point out a winner between EUR vs. USD in the short and medium term. However I think it becomes more and more clear that the debt problems will remain for a very long time. Euro traded up to 1.4444 high Friday. I am looking for a test of the falling resistance at 1.4467 on the up move, but maybe we saw the high Friday? If we break below the 1.43 support, I will give up the bullish bias.
Aussie failed to break that 1.0880 key resistance as expected on the first attempt. I am a bit careful up here as we are on the top of the recent range and I am unclear if it is wise to chase prices higher up here.
Today’s calendar:
14.30 US Chicago national activity index
00.45 NZ trade balance
Looking at a few interesting points in the markets trading wise:
- Next key resistance levels in the S&P 500 Emini futures are 1344.25 gap from 8/7 and the 7/7 high at 1352.75. We failed at 1352 last up run and we really need to see increased volume and a break higher this time. Another failure would be very bearish in my view.
- Corn bouncing higher after the test of the 670 target. Also hearing some traders buying bunch of puts for December with 500 strikes as cheap downside protection. I expect the upside to be limited for now.
- Crude still struggling to break above the 100 level and seems to be plenty of sellers above 100.
- Yen continues to be strong across the board no matter what the equity markets are doing, seems like the correlation between equities and JPY is out of the window for the time being. I still have a bias that JPY should sell off, but at the moment not happening. I think we could see BoJ on the bid it goes towards 77, so keep an eye on that. The best way to play potential JPY I reckon is to buy some calls, I see that 9th Sep at the money options are only at 9,84% volatility. That looks interesting in my opinion as I think the volatility will rise from that level.
- GBPUSD has broken the recent downtrend and looking for a test of the key resistance at 1.6444 next, as long as 1.62 holds.

Interesting articles:
China's growth 'unsustainable', say analysts - The Australian -
http://www.theaustralian.com.au/business/economics/chinas-growth-unsustainable-say-analysts/story-e6frg926-1226100929751

Cable appeals for new dose of easing - The FT -
http://www.ft.com/intl/cms/s/0/f7a00fc4-b5fb-11e0-8bed-00144feabdc0.html#axzz1T4MyiD1P

Spain Will Require Regions to Curb Deficits, Its Finance Minister Says - The WSJ -
http://online.wsj.com/article/SB10001424053111903591104576466192518918406.html?mod=WSJEUROPE_hps_LEFTTopWhatNews

El-Erian Says U.S. Vulnerable to Debt-Rating Downgrade, May Avoid Default - Bloomberg -
http://www.bloomberg.com/news/2011-07-24/u-s-vulnerable-to-downgrade-el-erian.html

A Proposal to Impose a Federal Revenue Ceiling - The WSJ -
http://blogs.wsj.com/washwire/2011/07/24/a-proposal-to-impose-a-federal-revenue-ceiling/?mod=WSJ_latestheadlines

A Summer of Rest, Not Rise, for Euro - The WSJ -
http://online.wsj.com/article/SB10001424053111903461104576461672647745588.html?mod=WSJEUROPE_hps_LEFTTopWhatNews

Wall Street Set to Act on Default, But How? - The WSJ -
http://online.wsj.com/article/SB10001424053111904772304576466373207538638.html?mod=WSJEurope_hpp_LEFTTopStories
Europe's ideologues took the whole world to the brink of disaster - The Telegraph -
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8658334/Europes-ideologues-took-the-whole-world-to-the-brink-of-disaster.html
Avoiding default is the easy part for America. It's mapping out the economic future that's hard - The Telegraph -
http://blogs.telegraph.co.uk/finance/richardblackden/100011034/avoiding-default-is-the-easy-part-for-america-its-mapping-out-the-economic-future-thats-hard/
Tim Geithner joins warnings of market meltdown as deal goes to the wire - The Telegraph -
http://www.telegraph.co.uk/finance/financialcrisis/8658500/Tim-Geithner-joins-warnings-of-market-meltdown-as-deal-goes-to-the-wire.html
Angela Merkel faces revolt in Germany over rescue deal - The Telegraph -
http://www.telegraph.co.uk/finance/financialcrisis/8658331/Angela-Merkel-faces-revolt-in-Germany-over-rescue-deal.html
Bank of Spain to Take Over CAM - The WSJ -
http://online.wsj.com/article/SB10001424053111904233404576462403813062690.html?mod=WSJEUROPE_hps_LEFTTopWhatNews
Euro Rally Isn't Convincing - The WSJ -
http://online.wsj.com/article/SB10001424053111903591104576465793120246506.html?mod=WSJEUROPE_hps_LEFTTopWhatNews
Why Euro May Keep Defying Gravity - The WSJ -
http://online.wsj.com/article/SB10001424053111904233404576462470995976308.html?mod=WSJEUROPE_hps_sections_markets
Greek Deal Facilitates Worsening Relations - The WSJ -
http://online.wsj.com/article/SB10001424053111903591104576465782128982822.html
Washington is drowning America - The FT -
http://www.ft.com/intl/cms/s/0/d27ba852-b619-11e0-8bed-00144feabdc0.html#axzz1T4MyiD1P
The eurozone crisis is on pause, not over - By Wolfgang Münchau - The FT -
http://www.ft.com/intl/cms/s/0/d2818128-b619-11e0-8bed-00144feabdc0.html#axzz1T4MyiD1P

Reid Working on Backup Plan to Lift Ceiling, Cut Spending - The WSJ -
http://online.wsj.com/article/SB10001424053111903591104576466502257302660.html?mod=WSJEurope_hpp_LEFTTopStories

Bernanke, Geithner, Dudley Are Said to Meet on Debt Limit - Bloomberg -
http://www.bloomberg.com/news/2011-07-22/geithner-said-to-meet-bernanke-dudley-to-discuss-consuquences-of-default.html

Republicans Back Short-Term Debt-Limit Agreement, Risking Veto From Obama - Bloomberg -
http://www.bloomberg.com/news/2011-07-22/obama-says-republicans-walking-away-from-fair-deal-in-debt-ceiling-talks.html






Technical’s and comments

Euro: Broke above 1.43, which opens for a test of 1.4472 (falling resistance from the May high). Support is former resistance at 1.43 now.
Cable: Next big resistance level is 1.64, followed by 1.6441. The interim falling resistance has now been taken out and buy on dips is my favorite as long as 1.62 support holds.
USDJPY: JPY is performing strongly no matter what the equity markets are doing at the moment and no sell off of the JPY to really spot at the moment. I still think JPY is very overvalued, but maybe not so much against EUR and USD. Alternative plays are AUD, CAD and NOK I think.
Swissy: Big down trend in this pair and no telling when it will end. My guess is that we will not seen any major reversal until the Fed starts tightening monetary policy. Risk off mode again this morning benefitting CHF and trading down to 0.8025 low so far. Minor resistance at 0.8092 that can be used to sell. Otherwise difficult to outline any levels other than the 0.80 as a key level in the current price region.
AUDUSD: Strong resistance up at 1.0880 that Aussie failed to overcome on the first test of this level Friday, as I mentioned in Friday’s report was a likely scenario. Would like to see a dip towards 1.07 before looking long now.
USDCAD: CAD performing strongly on the prospects of rising rates in Canada. However it has moved a fair deal to the downside and at this point I would like to see a pullback before looking to buy CAD.
S&P Future (ES): Tested the upper end of the recent range end of last week. Key resistance levels are 1344.25 and 1352.75. The volume on the approach is a bit low, but still better than the last few times we have failed in this area. Still a bit worrying in regards to potential upside. If we fail in this region once more I think we have a deeper down leg coming up.
Gold: 1620 high so far, the sky is the limit. The most important I reckon is the US 10 year rate, so keep an eye on that. Looks like buy on dips above 1580 for now. The big risk is if we get a debt ceiling deal in the US, could see strong profit taking.
Crude oil: Struggling to get above 100 level. I thought we would see a clean break higher if 99.50 was taken out. Another failure up in the 99.50 to 100 resistance zone would be big trouble for bulls I think. Need to hold key support at 98.50 today to avoid a move lower.



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