European Closing Thoughts 18/09/12

To ask for the bailout or not to ask, this is the question.

Investors are becoming worried that Spain may try to avoid accepting what would be a politically unpopular EU/IMF bailout. Taking aid is a condition for the European Central Bank to start buying bonds of any troubled euro zone government under its plan to lower debt yields which has helped to achieve the recent lull in the euro zone crisis.

Uncertainty was evident in bond markets. German Bund prices rose 32 ticks as the reversal of the recent falls continued although borrowing costs for Italy and Spain eased.  Italian government bond 10 year gross yield fell 0.98% to 5.058, Spanish comparable traded 1.19% lower to 5.903.

A real test for the Spanish government will be on Thursday when Spain will auction 3-10 year debt, it should be emphasized that Spain hasn't tried to auction as much in one sale since early March, when an ECB decision to flood the banking system with cheap three-year loans had also temporarily calmed the markets. (In our Mid-Session Review all the details related to today 12/18 months bills auctions)

Quite interesting the action in the currency market: the euro dropped 0.5 percent, putting it back below $1.306. The yen was also feeling the pressure, with speculation that the Bank of Japan might loosen policy on Wednesday following last week's move by the U.S. central bank. Sterling plus the Australian and New Zealand dollars also softened against the U.S. currency after all three had made recent sharp gains. The Aussie slipped after the Australian central bank left the door open for a rate cut.

A stronger dollar also helped keep the pressure on gold prices. Gold futures for December delivery gained 0.19% to trade to $1,773.90 an ounce on the Comex, while Crude for October delivery lost 0.16% to $96.48 a barrel on the NYMEX.

On the equity benchmarks' side, 10 minutes before the closing auction: the Stoxx50 fell 1.08% to 2,555.76,the German Dax traded 0.66% lower to 7,354.56. In Southern Europe, the Spanish Ibex fell 1.11% to 8,057.30, the Italian Ftsemib led the losers down 2.43% to 16,069.32.

Contrasting news were coming from the other side of the Atlantic, on the bear side: the bell weather FedEx slumped 2.2% after the world's biggest cargo airline reduced its profit outlook for the year through May after quarterly earnings dropped for the first time in almost three years amid reduced demand for premium shipping services. Earnings will be $6.20 to $6.60 a share compared with a previous forecast of $6.90 to $7.40, excluding potential benefits from cost cuts that the Memphis, Tennessee-based company is reviewing.

On the bull side: the National Association of Home Builders/Wells Fargo housing market index gained 3 points to a seasonally adjusted reading of 40, the highest the index has been since June 2006, the index has climbed back from as low as 8 during the recession. The index didn't even break 20 until December 2011.

Traders put more weight on negative headlines, even if the positive reading in the housing market helped to limit the damage from FedEx reduced forecast. The S&P 500 index shed 2.78 points, or 0.2%, to 1,458.41, with financials and energy hardest hit of its 10 major sectors.The Dow Jones Industrial Average DJIA rose 1.40 point to 13,554.4.The Nasdaq Composite COMP declined 4.46 points, or 0.1%, to 3,174.21.

According to our investment hypothesis markets are going to be stuck around their “pin” into the triple witching, but it's equally important to study what's going on in the subsectors to understand if the 2 month rally's driving forces are still in place.

Looking at the price action we all know that the news that will move the market will be the full-bailout request from the Spanish government, we do not know when it will come and in which form, reason why it's vital to be able to be flexible in your view and inflexible in your money management.

See you tonight at our first webminar.

Sources: Bloomberg, Reuters News, Marketwatch, The Wall Street Journal, Benzinga.

Originally posted at www.77sigmatrading.com