European Closing Thoughts: Hypothesis test.

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It looks like today the market is putting under investigations all our hypothesis at once.

Why asked yesterday if the Housing market alone  would have been able to support the whole economy. And our firm answer was No. Today bouncing hopes were all anchored to US New Home sales figures.

Sales of new homes dipped to an annual rate of 373,000 in August from 374,000 in July, the Commerce Department said Wednesday. Yet the pace of sales in July, originally reported as 372,000, was the highest since April 2010. To have an idea on where we are in the Housing Market: purchases of new homes fell to just 306,000 in 2011, the lowest level recorded since the government started to keep track in 1963, by contrast new-home sales averaged from 877,000 to 1.28 million annually in the six years before the 2007-2009 recession. Therefore even if, we are having some signs of the long-awaited recovery in the housing, the real estate market has a long way to go before saying it can support the whole economy.

At European cash close the DJIA edged down 0.13% to 13,439.80, the broader S&P500 Index traded at 1,434.09 or 0.52% lower and the Tech Nasdaq fell 0.81% to 3,092.35. It's important to observe that at this point the S&P500 has erased almost its gains since the FOMC said Sept. 13 that it will undertake a third round of quantitative easing by purchasing mortgage-backed securities at a pace of $40 billion per month until labor markets “improve substantially”.

In Europe, the Stoxx50 broke the 2500 level closing down 2.72% to 2,498.52. The German Dax was the last to succumb: it closed down 2% to 7,276.51. Southern European markets were hammered: Spanish Ibex fell 3.92% to 7,854.40 and the Italian Ftsemib nosedived 3.29% to 15,408.03.

Less than two weeks after topping $100 Oil futures struggled to hold on to $90 a barrel pressured by concerns about the euro zone and as a surprise decrease in inventories failed to lift prices. Crude-oil futures for November delivery  declined $2.06, or 2.2%, to $89.31 a barrel on the New York Mercantile Exchange.

The Oil's path was followed by precious metals. Gold for December delivery slid $15.50 or 0.88% to $1,747.40 an ounce on the Comex, as investors turned to other safe heaven assets such as the US dollar and US bonds, leaving the gold behaving as a commodity other than “fear” asset. A stronger dollar pressures dollar-denominated commodities as they get more expensive for holders of other currencies, diminishing their appeal as investments.

The ICE dollar index, which measures the greenback against a basket of six major currencies, traded at 79.934, up from 79.673 late the previous day. The common currency traded at 1.2863$ down from $1.2899 late North American trading Tuesday.

Let's put the European debt market under the spotlight:

Spain's benchmark 10-year yield climbed 32 basis points, or 0.32 percentage point, to 6.06 percent , the biggest increase since Aug. 2. German bunds rallied, with the 10-year yield falling 13 basis points to 1.46 percent after dropping as much as 14 basis points, the biggest decline since Aug. 2.The extra yield that investors demand to hold Spain's 10- year bonds instead of similar-maturity German bunds widened 45 basis points to 461 basis points, the most since Sept. 6.

Spain's two-year yield jumped 27 basis points to 3.44 percent, the most since Sept. 4. Spanish 10-year yields are still below the euro-era record 7.75 percent reached on July 25, 2012. They have averaged 5.87 percent over the past year. Italy's 10-year yield rose 10 basis points to 5.20 percent, and the two-year yield also climbed 10 basis points, to 2.43 percent.

From the bond market analysis we can suppose that Mr Rajoy words were well taken from the market: he asked the market to short his country's debt and this is what he had at the end of the trading session. But it's still to early to see yields going back to unsustainable levels.

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Are we on the verge to see an ECB's safety net test?

As we said in the Mid-Session review, we kept our “short” stance but we have to be really careful cause the German auction hinted us that we are still in the risk on mode, we need to look at how the market will behave on the next “up” leg, will it be able to regain the 2570 level in DJ Eurostoxx50 futures term? or will the “up” leg be used to put in place short positions. It's too early to load the gun. The Line of Least Resistance is still upward sloping.

Have a pleasant evening.

 

Originally posted at www.77sigmatrading.com

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