European Closing Thoughts 31/07/12

It looks like our hypothesis, earlier discussed, are finding more support. (Check our today's MidSession Review if you haven't done so)

As Bloomberg reports: Chancellor Angela Merkel's coalition rejected granting the permanent euro rescue fund access to European Central Bank liquidity via a banking license, as the Finance Ministry said it saw no need for any such move.

“The rules of the European Stability Mechanism don't foresee a license to allow refinancing at the ECB, the Berlin-based ministry said today in an e-mailed response to questions. The ministry isn't holding talks on the topic and neither are secret meetings taking place on such proposals, it said”. Bloomberg reports.

As soon as the news was published European markets headed south: Euro Stoxx 50 fell 0.36% to 2,331.96,  Italian and Spanish benchmarks fell the most respectively 1.03% to 13,833.86 and 0.67% to 6,756.40. Spanish government yields jumped 2.22% to 6.76, Italian government bonds yields followed the same path rising 1.71% to 6.13. The safe heaven, German Dax, is holding it's early gains, it's up +0.24% to 6,790.56.

The Eur/$ cross moved in the opposite direction relative to European indexes, the common currency gained 0.36% versus the greenback to 1.2304$ as investors are closing long positions in the Dollar as we head into the Federal Reserve two-day policy meeting, which may result in additional action to stimulate the economy and therefore to flood the market with dollars.

The question we are asking to ourselves now is:  Has the flagpole been set to high?

Short interest, or total number of shares borrowed and sold by investors betting on declines, fell 3.9% from a nine-month high of 19.7 billion in June through July13 according to twice monthly data compiled by Bloomberg form the NYSE and the Nasdaq Stock Market.

It's worth to mention that: ” the S&P 500 has rallied 10 percent this year amid optimism central banks worldwide will continue efforts to spur growth and prevent Europe's debt crisis from derailing the global recovery. The index capped a third straight weekly gain on July 27, the longest streak since March, amid speculation that the ECB will buy bonds to ease borrowing costs for Spain and Italy”.Thanks to Bloomberg for the note.

These remarks  are driving our thoughts towards a possible “delusion” to come, we will see, but the important thing is letting the price-action to tell us the side to play not our opinion. A big lesson I have recently re-learned.

Another day is about to come to an end,  the Fed is now in the spotlight.

Have a pleasant evening.

Originally posted at www.77sigmatrading.com