Intraday Market Thoughts

S&P Awaited, UK Won't Back United States of Europe

by Adam Button
Dec 11, 2011 14:57

European leaders took major steps toward a fiscal union but the market

was only lukewarm due to the objections of Britain and the political

minefield of implementation. Markets turn to S&P's reaction to the EU Summit outcome, awaiting which sovereigns will be downgraded. For the second day, AUD and CAD were the best performers while USD and JPY lagged. Weekly CFTC data showed trimmed EUR shorts and a jump in AUD longs. See the chart below highlighting how net speculative longs in EUR vs USD have always followed the actual EURUSD spot price.

All 17 euro nations agreed to move forward with a plan to allow the

European Court of Justice to strike down national laws that don't

enforce fiscal discipline. These are the first real steps toward a

United States of Europe. US-like integration is probably fantasy but a

fiscal union would be a game-changing solution to the current crisis.

Italian 10-year yields fell 10 bps to 6.36% after rising as high as

6.69%. There was widespread talk of ECB bond buying but that seems to be a customary rumour on every perpipheral bond market improvement. Largely overlooked was an ECB endorsement of banks borrowing term funding and investing in sovereign debt.

The latest chart shows EUR NET SPECULATIVE INTEREST vs USD has reached the highest net shorts since June 2010, highlighting EURUSD has always followed the flows in speculative interest

Economic data was positive in the US as an improved trade balance led to upgrade to Q4 GDP forecasts and the U Mich consumer sentiment survey improved to 67.7 from 64.1, beating the 65.6 expected.

The S&P 500 gained 0.9% on the week after a 1.7% rally on Friday.

Weekly Charts

We are entering the time of year where technicals and flows begin to

outweigh fundamental news as liquidity begins to thin and books are

closed out for the year.

In spite of the drama in Brussels, the euro's weekly range contracted

for the second week, trading in a 200-pip range and closing almost

flat on the week. The message is that a move above 1.3550 or below

1.32 will lead to a sustained move.

USD/JPY is settling into a range from 76.57 to 78.28.

Cable ran into selling pressure near 1.58 for the second week as it

consolidates before another slump.

AUD closed virtually unchanged on the week, which has to be a

disappointment for the bulls after the prior week's 500 pip surge.

Committments of Traders

Traders at the CME pared back bullish bets on the US dollar by 19% in

the week ending Dec 6. Positioning changes were all less than 10% with

the exceptions of the Australian dollar where longs more than doubled

to 30K from 13K and the Canadian dollar where the net short fell 23%.

The euro remains in a deeply negative position at -95.8K but is

improved by 8.5K compared to last week. As Ashraf showed earlier, the

EUR is lagging the bearish speculative position. JPY longs are at 38K,

down 2K compared to last week. The GBP short fell by 2.5K to -43.5K

and the CAD short fell by 5K to -20K.


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