The June portfolio results are now put up at the performance section: Capital3x June portfolio
It was the fri move on risk markets which we expected all through the week and we kept warning about it. The most important trade calls were on yen pairs which too we kept repeating about the impending rise of EURJPY to levels over 101 even while prices were crunching down at 98.5. Without saying much more about our other calls in the trade room and our biases via the charts over the course of the last week esp on yen pairs because the last thing we want to do is sound narcissistic. We are happy as long as our subs made money on both official trades added on the trade sheet and the unofficial trades suggested via the trade room for those who would like to indulge in more trading than we do.
The friday rally was almost as if the financial markets had forgotten the problems plaguing the US and EU markets. Now I do believe, looking at prices at resistances levels being another reason, that we are going to see some disappointing news over the course of the next few weeks which will allow markets to correct back to support zones. The first signs of this will be when markets increasingly ignore additional good news.
Fundamentally there was reason enough for financial markets to paint those massive green candles on almost all financial markets.
This has been a roller-coaster ride. Spain and Italy refused to sign the stimulus package which would have led to a failed summit. This tough negotiation stance obviously succeeded. Under pressure from peripheral countries, the heads of governments from the EMU member states came together and agreed on emergency measures to help the highly indebted countries:
- Direct help for banks: The ESM treaty states that the rescue fund is not allowed to directly recapitalize banks but should transfer the money to the peripheral governments. This, in turn, would boost these nations’ government debt, which is why Spain and Italy protested against this procedure. Tonight, they succeeded with their demand that the ESM in the future might directly help banks. According to the summit communiqué 1, this first of all requires the installation of a common banking supervision in the euro zone under the auspices of the ECB. The governments intend to reach this until the end of 2012.
- More flexible help: According to the summit statement, the heads of governments agreed to “flexibly” use the existing instruments of EFSF and ESM to support the government debt markets. The ESM treaty guidelines as they are already allow that the ESM buys already issued government bonds from the crisis countries without the need for these countries to commit to stringent stabilization programs which are regularly controlled by the Troika. Such loose requirements also apply to the so-called precautionary financial assistance which are credit lines granted to crisis countries by the ESM. On first sight, therefore, the heads of governments did not agree on something new tonight. However, EU president van Rompuy in the press conference gave rise to the impression that the conditions attached to these support measures will be loosened further in the future.
- Spain: Spain already applied for EFSF help for its banks. Should this be transferred to the ESM later on, these claims should not be preferred with respect to other creditors. Spain insisted on this rule because it feared to deter private investors. Growth pact does not much to help growth Already yesterday evening, the heads of governments agreed on a EUR 120bn stimulus package for the euro zone. This program equal to roughly 1 ½ % of the euro zone’s gross domestic product – on first sight a sizeable sum. However, taking a closer look at the components of the program reveals that the government heads are not really committing any significant amount of new money
The summit does nothing to help growth
The heads of governments agreed on a EUR 120bn stimulus package for the euro zone. This program equal to roughly 1 ½ % of the euro zone’s gross domestic product – on first sight a sizeable sum. However, taking a closer look at the components of the program reveals that the government heads are not really committing any significant amount of new money
- European Investment Bank (EIB): The capital of the EIB is to be increased by EUR 10 bn. This will enable the bank to grant a total of EUR 60 bn worth of additional loans over the next four years. Whether this actually works out in practice is more than doubtful. First, the number of meaningful projects is limited. Second, private investors will be hesitant to finance projects together with the EIB, because in the event of a bankruptcy, the EIB funds have to be paid back first. Furthermore, the only way any additional stimulus to the economy can be expected is if such projects were unable to be launched without EIB assistance. But this is rather unlikely, as the EIB can only grant loans if repayment is secured, and there are likely to be enough private investors willing to invest in such projects.
- EU Structural Funds: In the EU’s seven-year “Multiannual Financial Framework”, regional assistance amounting to EUR 55 bn is budgeted for 2013. This is in addition to the funds not yet used for the current year. This money will now be deployed to combat youth unemployment and to assist small and medium-sized companies. The catch is that a considerable portion of this amount has already been earmarked for other projects, and is not even available. This means that hardly any new money is being made available to jumpstart the economy.
- Project bonds: The EU guarantees a small proportion of the capital used for these bonds to finance private investment in energy, transport and broad-band infrastructure. In a pilot phase EUR 230m will be made available from the EU budget. This is intended to stimulate additional investment of up to EUR 4.6bn.
On the whole, the growth pact is not likely to provide any significant boost to the economy of the Euro zone. The growth pact does nothing to solve the fundamental problem that the uncertainty caused by the sovereign debt crisis weighs heavily on the economies.
Following Angela Merkel’s clear no to euro bonds, no one expected the EU heads of government to agree on any of the many versions of a joint bond. This also applies to joint bonds with a maturity of up to 12 months, so-called Euro bills.
We do not think much of the idea of joint bonds, because they would remove the healthy pressure from the periphery countries to reform their economies. That such concerns are justified was seen at the start of the year in Italy. Prime Minister Mario Monti, hailed as a reformer, pushed through an exemplary pension reform. But after the ECB took the pressure off Italy with its three-year tender, the country failed to forge ahead with anything worthy of being called a labor market reform. In the coming years, wages in Italy are set to continue rising faster than productivity, and the country is likely to fall further behind.
Nevertheless, we believe that Germany would ultimately agree to joint bonds if it had to choose between the mutualisation of liabilities or the currency union falling apart. One compromise could come in the form of the so-called debt redemption fund, proposed by the German Council of Economic Experts. To many voters, it suggests that this can help reduce debt. In actual fact, it is essentially a joint bond whose maximum volume would correspond to that amount of debt of the euro zone countries, which exceeds 60% of gross domestic product at the start of the so-called redemption fund. Once introduced, however, this ceiling would likely be removed, so that it would ultimately lead to an unlimited mutualisation of sovereign debt. The currency union will continue to become a transfer union. This weighs on the long-term outlook for EUR-USD, even if the currency shortly benefits from today summit result.
On the economy side, according to Eurostat’s preliminary estimates, the inflation rate in the euro zone was unchanged at 2.4% in June as expected. The inflation rate excluding food and energy will likely remain at 1.6%.
Lets now take a closer look at some technical charts and setups more relevant to our trading.
Forex and futures setups
ES Continuous ends the day at the upper bar of 25,2 BB line which also coincides with the 100 DMA in the close vicinity. This is the second attack on the 100 DMA at 1358 zone in June. What makes this attack special is the shock and awe that i has managed to create with the move from 1320 to 1358 coming in one single day. Where do we go from here? Well two things could happen:
1. We see a strong close above 1360 this week which just cements that the floor is in for 2012 (High likelihood)
2. We see future fall back to 1320 zone this week which will be the more rational expected outcome.
ES on weekly stands above the BB25,2 at 1348 and 20 WMA at 1356. The push higher seems to have taken these out but given some space for momentum which allowed prices to swing. I strongly suggest to wait for a week more to see if 1356 was truly taken out. The downside 1280 looks bleak but still possible on the weeklies.
BTP has massive gaps at 97.0 which is almost sure to be filled. We saw another case of gaps being closed on friday as EURUSD closed 1.2580. These gaps here is of the highest priority and they will be closed which means EURUSD has downside back to 1.253 zone before any further charge at 1.2780.
EU Schatz for all the drama on EURJPY charts still closed almost where it opened which means the bulls fought back the lost territory. Schatz has the potentail to go full back up to 110.60 before any furthe test of the lower boundary. Inc ase 110.4 gives way, there is but air below to 110.039
EU bunds too like the schatz saw a late fightback on fri as prices closed well above 140.5 zone. Can the prices go for another test of 142 which will fight with our thesis of a retest of 1320 zone on the ES.
This is an easy chart to read. EURJPY charts ends at 100.98 which is after testing the 100 DMA at 101.46.
The prices just about managed to expand the bollingers. The daily stochastics are bending lower while vortex too negative thus indicating this was short covering rather than well structured trend move. EURJPY will come down to 99.5 before re launching if at all.
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Verdict: Friday was short covering of the kind which can make the bears go weak in their knees. But all is not lost as we wait for supportive move back down for risk assets and if those moves do materialize then expect a tug of war for markets to resolve the medium term direction. The case for bears have weakened considerably exp given some hard evidence via JNK/TLT, Emerging bond fund charts and the carry proxy charts of AUDJPY.
Update on Capital3x bond market Indicators
The Gladiator gave stellar display of catching the trends at sweetest best. On friday Asia, the Gladiator went +1 at 1339 and it stayed there the whole time for over 20 handles. This makes it another profitable week for Gladiator as over 40 handles were won purely last week.
The Falcon EURJPY Daily charts have been neutralised and that means we may need prices to now spend some time building its base. The daily charts also reflects how strong the EURJPY price action was in last week to throw off some weaklings. The falcon daily will be back once EURJPY daily charts build some base above the daily BB25,2 mid levels.
The Falcon EU was +1 1.257 and once again a winner as prices hit 1.2650 in NY. But entering EU was tough as prices did not retrace below 1.256 whole of EU session