Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
As first leaked last Wednesday, and reported on late Friday the Spanish "don't call it a bailout" arrived in principle on Saturday. After spending many minutes reading through the variables, pathways, and unintended (or intended) consequences of said "don't call it a bailout", my head is swimming. At this point it seems that either/or/both the ESM/ESFS (rescue funds) of Europe will be used to transfer funds to the Spanish banks. But not directly. Rather to the Spanish bailout fund – by doing this it doesn't reduce the debt to GDP ratio of Spain unfairly. Already Ireland is squacking about renegotiating their terms.. and so it goes. That said none of this appears to be 100% final other than agreeing that it will be done in some form or another. Where bondholders get placed in the order of seniority is also causing some consternation. For those who do not enjoy spending hours reading through this mess, simply keep an eye on Spanish bond yields. After opening substantially lower (bullish) they actually gave up all those good vibes here in the premarket (bad), which says we remain in Euromess 2010-2012+. But kicking of cans in all directions continues.
Futures opened last night in a euphoria, but as I type have dipped substantially – some 11-12 points off the overnight highs. That said, we are still set for a gap up on the open as Pavlov dogs are trained to react to all interventions in a positive manner. Last week, I had mentioned that the 1320s looked like a potential target for this rebound, but I also mentioned that when intervention is on the stage technicals can take a back seat! That said, even WITH intervention, this reduction in euphoria still keeps the 1340ish level in play, and the S&P 500 won't be creating a new "higher high" right at the open. The S&P 500 has come a long way in a week and unless the market is setting up for a "V shaped" move the higher it goes without consolidation the more short term risk starts to get built in. Also it is important to note last week's "best week of the year" did not even get stocks back to highs of the previous week!
I'd offer the most bullish setup would not be a V shaped move but the inverse head and shoulder formation we discussed last week. These rapid, volatile moves are not signs of strength but major indecision and headlines. One can continue to monitor U.S. bonds, the U.S. dollar, and oil as global "risk off/risk on" and/or global growth proxies.
Aside from the Spanish gyrations, I expect almost all discussions this week to center around this weekend's Greek elections and the FOMC meeting next week. The domestic economic data calendar is light with retail sales Wednesday dominating the schedule. Inflation measures (PPI, CPI) and consumer confidence are items that some might monitor but nothing of magnitude like the ISMs or monthly employment data. We remain in a headline driven market, very much like long periods of 2010 and 2011 (and 2008 and 2009 for that matter!).
Over the weekend some mixed Chinese data came out and even if we did not have Euromess 2012 to deal with, there is still the not small issue of a slowing globe. Already "forgotten" is the punk U.S. employment data that is only a week old – oh how time flies.
- China's exports and imports both rose sharply in May, while inflation slowed substantially, hopeful signs for the world's second-largest economy. A raft of data released over the weekend by the Chinese government present a mixed picture, but overall suggest an economy stronger than many market players feared at the end of last week.
- Industrial-production growth ticked up slightly, albeit from an April pace that was the slowest in nearly three years, and that auto sales and property investment were stronger
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