Capitulation Only Way to Get European Leaders to Act

The financial markets are screaming for concrete action by the European leaders instead of just talk. Without any short-term or long-term plans in place, fear and hope are the driving forces. It looks as if it is going to take capitulation in the financial markets before the European leaders take their task at hand seriously.

The Euro reached a seven-week low overnight against the U.S. Dollar. Trading activity has been firm following the U.S. holiday. The overnight weakness was triggered by a drop in French consumer confidence. Traders interpreted this report to mean that the Euro Zone is moving closer to a recession.

Short-term interest rates also rose in Italy indicating that despite efforts to stem runaway rates by the European Central Bank, market forces seem to be stronger than the central bank at this time. Italy appears to be a lost cause as the market has been unable to respond to ECB bond purchases as well as the new government in Italy.

Portuguese debt was downgraded to junk on Thursday. The situation is beginning to unravel fast as bearish traders are beginning to increase bets that the debt crisis will soon expand to a few core Euro Zone nations. Hungary’s Forint currency was also under pressure after Moody’s downgraded the country’s credit rating to junk status.

German Chancellor Angela Merkel rejected a proposal to put new demands on the European Central Bank to become the lender of last resort. This is a clear signal that the region is likely to see a major sovereign debt default or a major bank failure. Merkel also rejected proposals for Euro bonds. Germany is definitely digging in to protect itself.

Bearish risk sentiment is likely to continue to drive equities and commodity markets lower as traders continue to shed risk. Without clarity and conviction from European leaders, pressure will continue to drive these markets lower as well as the major foreign currencies. Downside momentum is building in the Euro, setting up the potential for a hard drive into a four-month low.

Technically the December Euro is clearly in a downtrend. It is currently walking down a Gann angle from the 1.4241 top at 1.3401 today. Continue to look for lower markets as long as this downtrending angle remains resistance. Momentum is very strong to the downside. Look for volatility to rise, driving this market into the October 4 bottom at 1.3142 over the near-term.