Today was a bit of a historic one for the markets… Chrysler finally filed for Chapter 11 and became nationalized, Obama told the markets the US government will select Chrysler’s new board of directors, continuing jobless claims hit an all-time high of 6.27M, Trichet scolded his comrades on the ECB governing council for running their mouths, and little Timmy Geithner was selected as one of People magazine’s worlds sexiest people… what a day.Oh, and some maniac tried to take out the Dutch royal family to top it all off.
Eurozone CPI sends euro lower:
One of the main reasons inflation, disinflation, and prices have been a recurring theme in our updates is because of all the underlying fundamentals that move markets, it’s right up there at the top next to interest rate monetary policy. At 0500 EST this morning Eurostat released the latest Eurozone CPI flash estimate which printed worse than expected, at 0.6%, and that was even lower than last month’s flash estimate.
The lower CPI print stopped the EUR/USD’s march to 1.3400 dead in its tracks and we saw the pair correct all the way down to just under the 1.3200 level before finding support. The lower price inflation data out of Europe also contributed to spot crude and spot gold getting hit after the 0500 EST timeframe, pretty much every market that needs the help of inflation price pressures came down just as the fundamentals would dictate.
It took the euro’s market correlation to equities to bring it back to life and get it back above 1.3200 after Wall St. opened… the S&P 500 futures and real S&P 500 put in a strong performance right up until Obama’s press conference about Chrysler’s bankruptcy, then it was back into the red and a close below key price zones for both the Dow and S&P 500…
ECB confused and disjointed:
After a half dozen ECB members spent the past few days running their mouths and talking the euro up and down, Trichet has finally dropped the hammer to put an end to the rhetoric and speculation coming out of Frankfurt and Brussels.
Early this morning ECB Nowotny said:
“Won’t comment on non-standard tools before May 7, Trichet asked members not to comment on new tools”
There’s a clear divide within the ECB governing council. Some voting members want to take the ECB’s key lending rate below 1.00% in addition to circumventing the Maastricht Treaty which currently prevents the ECB from buying EU sovereign debt. Other members do not want the key lending rate to drop any further, they want to scale back on government stimulus, and they would like to allow the fundamentals to dictate future monetary policy.
I’ve always liked the ECB better than the Fed, mainly because of the fact not every ECB governing council follows Trichet lockstep as members of the FOMC do with Bernanke. The Fed is always singing from the same page and it’s rare to ever hear a Fed member give opinions that go off the script, whereas with the ECB, some of their members speak exactly what they are thinking regardless of current ECB monetary policy.
But today’s CPI data should further serve to confuse the members of the ECB governing council and cause even further speculation. I can promise you the debate between ECB hawks and doves is really going to heat up next week as we draw closer to Thursday’s monumental rate event.
As you know, I gave this bear market rally on Wall St. until May to continue and once we hit the first of May, all bets are off. Tomorrow is the first of May and I’m taking all bets off on Wall St. Again, this is purely my opinion and my own speculation on the near-term future of the Dow and S&P 500, but I’m sticking to that analysis for equities. If I’m wrong, great, that will just make it even easier to trade the yen crosses, I really don’t care either way, the beauty of trading FX is being able to capitalize on both the euphoria and misery of market participants on Wall St.
If Wall St. doesn’t pullback from these highs, I believe it will need the following factors to work in its favor to continue the rally:
- A continued rise in consumer and producer prices
- A continued rise in the import price index and employment cost index
- Crude sustaining a break above the $50 level and continuing to move higher
- The IMF, World bank, and other central banks continuing to sell gold to raise cash to pump in economic stimulus
- A stronger overall sell-off of the Japanese yen
- The USD Index breaking below support levels
- The 10-year Treasury yield sustaining a break above 3.05%
- Bottoming in US housing prices and foreclosures
One factor that could lead equities higher–
Rising job losses and a steadily eroding unemployment rate shouldn’t have much negative impact on equities. And out of all those factors I listed above, one of them stands out above the rest… should the dollar and the USD Index move lower, equities will not likely be able to do anything but go up regardless of all other factors.
I could be the biggest equity bear on the planet, but it won’t matter what I think or anybody else thinks, because if the dollar continues to move lower, the S&P 500 and Dow should go higher, end of story. A declining USD Index will reveal a lack of risk aversion and a greater appetite to send money-flows into riskier markets. Right now that 84.50 zone on the USD Index remains a very key level, and a sustained break below 84.00 would serve to further boost the S&P 500, crude, and of course the euro, cable, and Aussie.
Dear Obama and Granholm: shut up
Obama and the governor of Michigan should keep their mouths shut on this issue with Chrysler and their creditors, get out of the way and let the rule of law go through due process. If creditors don’t want to settle for pennies on the dollar, they have every right under the rule of law to do so, that’s part of the deal, it’s part of the agreement Chrysler makes with it’s creditors when they sign those contracts. How is this being greedy? How is it being greedy to fight for what what is contractually owed? Chrysler is liable for its debts and the creditors are under obligation to themselves and their own investors to collect what is due. Chrysler owes the creditor hedge funds $6 billion and the hedge funds should fight for what they are owed.
This politics of all this are disgusting with Obama and the governor of Michigan throwing the word “hedge fund” because they know the term has a bad connotation and conjures sour thoughts in the minds of people who don’t have a clue to understand how business works, especially the business of lending and bonds. It’s a whole lot easier for politicians to put all the blame on hedge funds to divert attention and explain away the fact that billions of taxpayer money have gone to float insolvent companies like Chrysler. When the politicians blame the hedge funds, it helps get the real facts of the matter off the minds of taxpayers who are also acting as creditors to Chrysler and GM.
Taxpayers and the government expect to be paid back for what they lend to Chrysler, right? Of course they do, so why is it evil and greedy for the hedge fund to expect to be paid back? If you’re in the business of credit and lending, the lifeblood of your business is getting paid back by your debtors according to the terms of the agreement. Yes, it’s tragic what’s happening to autoworkers who are laid-off, but it’s ridiculous to put the blame on hedge funds for decades worth of Chrysler’s mismanagement and producing some of the crappiest cars on planet earth.
I’m not saying the hedge fund creditors should get every penny they are owed, they are just as stupid for lending money and extending credit to a a worthless, insolvent company, and they need to take their lumps too, but again, they have every right under the rule of law to fight for what they are owed. It’s downright scary to hear such strong anti-business and anti-free market rhetoric from the government, especially from the so-called leader of the free world.
What kind of example is the government setting for young people? What kind of message are they sending to kids who want to understand how business works? The message is… if you’re in the business of turning a profit, you’re evil and unpatriotic. The government is also sending the message that failure is never an option and if you are about to fail, somebody with more money than you will come along to the rescue. I hope Chrysler’s creditors drag this whole thing out in court and it ends with Chrysler’s complete destruction. Somebody needs to fail, Wall St. needs a failure and the economy needs to deal with a failure. Kids needs to see that not everybody makes it and it’s a cruel world sometimes, but that’s the way life goes.
Thursday trading:
Don’t forget tomorrow is a European holiday and most Euro banks will be closed which means Friday trading conditions will be even more ill-liquid, leading to the potential for sharp price swings.
EUR/USD–
There are three key pieces of USD fundamental data released tomorrow that may add some price volatility. The first is the Michigan Sentiment which I believe may print at or just under expected. Not many in the state of Michigan have much to be excited about these days, so I don’t expect any big upside surprise there.
The ISM Manufacturing and ISM Price Indexes are also critical. I believe ISM Manufacturing may show an improvement over last month, but I’ll be most interested to see how ISM Prices print. I know I probably sound like a broken record, but inflation and prices are going to be the key to recovery, especially for equities in addition to non-risk aversion currencies like the euro, pound, and Aussie. If ISM prices show upside it would certainly be a better sign for Wall St. and economic recovery. I believe disinflation remains a viable risk on the markets, so keep you eye on that data.
That’s all I’ve got for now. I’m about to head out of town and I’ll be gone for a few days, however, I will have an update on Sunday to get us ready for next week’s trading. If you do trade tomorrow be smart with your risk and money management as Friday’s are usually the day traders give most or all of their weekly profits back to the market.
-David
