While we are all fixated on the EUR apparently the market is telling us to be more focused on the AUD. Last night the market showed its hand when a big fall in both currencies on no news caused a sharp move lower in the ES (SPX Futures).
Today the EUR although weak was not the driver of the late afternoon selloff. Instead a sharp move lower in the AUD seems to have triggered selling in the futures.
As I have been posting numerous times the divergence between both currencies and the ES are big so expect further currency weakness to be magnified in moves within equities. As a reference point, here is where the AUD currently stands. A very weak chart for sure.
Now on to bigger and better issues. What is playing out before our eyes is truly epic in scale and faster than anyone has anticipated. Where this ends only history knows the answer but the risks to the global bond market, equity market and economy cannot be understated.
Sovereign Debt Yield Grow And Spread Beyond The PIIGS
Sovereign debt yields continue to move higher as do spreads against German bunds. The following chart (courtesy of Gonzalolira- We’re In The Middle Of A Run On Europe ) shows the speed of this move and the contagion as it is no longer limited to the famous PIIGS acronym.
Central Banks Acknowledge The Problem
Eric Rosengren, Boston Fed President during a speech today was quoted “Crisis might warrant coordinated action by Fed, ECB.”
Some market participants may interpret this as some form of quantitative easing. The reality is for them to be discussing this means stress is high and their “coordinated action” would be in the form of a lending facility like the currency swap lines created a few months earlier. The ECB already has lending facilities in place but apparently they are not sufficient to handle the rising funding stress.
So there very likely will be some emergency facility announced and it will rally markets but as history has shown the “shelf life” during a period of crisis is short.
Growing Short Term Fund Stress And USD Demand
Zero Hedge ran the following chart (full article found here) showing the current demand for US dollars. Hard to imagine a currency that is so hated globally is in such demand but it is the global reserve currency still.
Something a little perplexing is why this rising stress in the USD behind the scenes takes so long to show up on the charts. History shows though when it appears on the chart the move is exponential as witnessed by the five year weekly chart below of the DXY.
It’s Not A European Only Problem
As if the first bankruptcy of this crisis being a US primary dealer is not evidence enough that this is a global problem, Fitch came out with the following statement late in the afternoon.
“Eurozone contagion poses threat to U.S. bank rtg (rating) outlook”
I believe the trade that many have discussed is upon us. What is happening in the credit markets is both scary and epic. History only knows the answer but the risks cannot be understated here. I continue to take my equity guidance from credit and currencies. They are signaling severe stress and USD shortfalls.
This is not nor will not be an easy trade. For those who have stayed short it has been brutal to say the least. Stay vigilant here. Manage risk. Temper emotions. For three years investors have been conditioned to buy the dip.
As stated multiple times now the consequences of all this Fed and government easy money is a very real bubble in the “perception” of risk.
Images: Flickr (licence attribution)
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