A Very Divided Eurozone

The two days off over the weekend did little in the way of making the economic picture any better in Europe. This week Germany’s Federal Constitutional Court in Karlsruhe is going to decide whether or not to suspend the 500 bil Euro Stability Mechanism, on the same day the FOMC starts its two-day meeting. Lately it’s been all clear sailing for the stock market, but as always, that can change at any time. The Greeks are back in the news because Antonis Samaras’ partners in the government are now complaining about the budget cuts demanded by the country’s so-called troika of creditors. The Dutch will also be voting on Wednesday whether to allow expanded powers as the European Commission puts up a proposal for an integrated banking system.  It’s a vicious cycle that never seems to have an end. It is beginning to look like the ECB is now ready to offer its support, but the big question is, can the 27 countries that make up the Eurozone all agree?

Up to now the ECB has had a hard time getting everyone to agree, but now parts are starting to work. The Euro currency traded as high as 1.2811. This is a far cry from where it was going just a few months ago when it tested critical support at the 1.2100 level. The ECB’s bond buying program has helped push Spanish 10-year yields down to the lowest they have been in weeks.

What we have learned throughout the credit crisis is there are going to be good and bad times for the stock market. In the first quarter of 2012 the S&P rallied nearly 12%. In the second quarter the S&P sold off nearly 12%. Going into the first week of September the S&P is up nearly 14%. Greece, Italy and Spain, along with several other countries, still have some very hard decisions to make. The longer they put off the hard choices, the worse off they become. In an interview with CNBC’s Maria Bartiromo, Italian prime minister Mario Monti said he believes the time has come for EU leaders to address the political and psychological backlash against the euro. Monti said the last thing EU leaders can allow is for the single currency to set Europe’s citizens against each other.

“Why do we never have a discussion on, in particular, the increasing resentments and comprehensions, backlashes psychologically and politically, that this euro crisis has been spreading around Europe — between North and South, between old and new member states, between various segments in society,” Monti said. “Does it make sense that the 27 heads of governments of the European countries meet every two months, sometimes every month, to spend one day, one night to discuss very important details like whether there should be or not private sector involvement in the financing of Greece?” he asked. “Or what kind of conditionality should there exactly be in a given scheme? Aren’t the finance ministers even better equipped than the heads of governments to deal with this?” Monti believes it’s too hard to get any deals done with the world media sitting outside the summits in Brussels and the demand by the financial markets to get the latest plan completed.

As we head into this week’s two-day Fed meeting with the S&P up against its May 2008 1441 highs, we still have this funny feeling that somehow an upset is coming our way. After the S&P sold off from up 12% in the first quarter to nearly unchanged on the year in the second quarter, everyone said people should have taken some profits, that when was the last time the S&P was up 12% in a year, much less in a quarter? Rest assured that this is not over. There are going to be more ups and downs, it’s just how long can the markets keep going up with all the debt piling up like it is? Say hello to the election!

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Our view:
We have a few numbers to get past this morning. With the two-day Fed meeting starting tomorrow it is our guess things begin to slow again. On Friday the volume in the ESU was over 2 mil, yesterday’s volume was only 1 mil. The other part of this that no one is talking about is that it’s rollover and it is always slower during the roll. We lean to seeing pretty much the same price action as we did yesterday, an early selloff and then look for some type of bounce. As always, keep an eye on the 10-handle rule and please make sure to use protective buy and sell stops when trading.

• It’s 6:00 a.m. and the ESU is up 1.75 handles at 1428.25, crude is down 5 cents at 96.49 and the EC is trading 1.2792, up 22 ticks.
• In Asia 6 out of 11 markets closed lower.
• In Europe 12 out of 12 markets are trading lower (CAC -0.50%, DAX -0.17%).