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Market Essentials - Juiced Up Markets Get The Jitters

Last updated 9/26/2012 7:56 PM EST (GMT -5) 0 Comments - Add your comment

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Risk aversion plays coupled with profit taking has seen equities, commodities and risk correlated currencies all head lower overnight as the Central Banks recent liquidity fix takes a back seat to the uncertain future of Spain and the Euro Zone as a whole.

EU Watch

As Spain travels along the tracks to Bailouts-ville, Spaniards are doing their best to delay or derail its inevitable destination. In yet another case of knowing the fate months in advance, urgency by the power players of Europe have failed to integrate on any level and ultimately leave troubled nations defenseless against their debt laden economies. What’s more concerning is that behind this ultra slow Spanish train wreck is a much larger Italian locomotive heading down the same tracks.

The short term moves for Spain are clear and is why this is hard for Spaniards to swallow as Prime Minister Rajoy has made it clear that he is committed to fiscal and structural reforms and commented that all of Spain needs to make sacrifices. The 2013 budget, structural reform package and stress test results are all due this week, with outcomes key to understanding how the final leg for Spain will play out.

Spain’s 10 year bond yields have crept back up over 6% and Italy’s close behind at just over 5% but in a poor showing that has added to the negative European theme, Germany held a Bund auction offering out 5 Billion Euros worth of 10 year notes that only saw bids for 3.9 Billion Euros (average of 1.52% yield). Illustrating investor concerns as interest for the usually strong auction fell short on demand.

AU/Asia Watch

The troubles of Europe are not new and their current situation was seen 6 months ago but the one story that has changed in the markets mind is the Chinese story. There was this quiet belief that China would start to come good and show improving economic signs which seems to be taking longer than anticipated. This delay has raised questions and for a global market looking for a hero, it seems that their hopes are fading with each negative print of economic data. It’s this recent global re-evaluation of China’s situation that really is weighing on markets.

Outlook

The uncertainty surrounding Spain (& Italy) has given reason to pull back an overdone market juiced up on Central Bank stimulus. The Fed and ECBs recent actions do provide underlying support for risk assets but the flows will take time to filter through, so for now we are in deep with the EU story that will see more countries sign up for a couple of decades of misery and the implications that surround that decision. The slow (no) growth global gift is the result of inaction by leaders who could have made a difference and although we may receive Central Bank inflated financial markets, the true value of those markets will lie somewhere well below what the central banks are giving us, with real questions on whether it can be sustained if the growth never comes.

Trade Idea

We are seeing a short term risk bounce in some assets after finding some support post last night’s risk aversion moves. The obvious risks surrounding Spanish unrest and budgets, stress tests etc should keep the topside capped. We can look to sell the AUD/USD towards that 1.0390/00 level with a stop above 1.0420. First take Profit for half of the position is at 1.0360 (move the stop to entry) and take the balance back at 1.0335

For more intraday analysis and trade ideas, follow me on twitter @ATaylor_GFT

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About The Author

Andrew Taylor's financial markets career started in 1991 in the interbank FX market,where he worked for one of the largest banks in Australia. Andrew then went on to trade on behalf of some of the biggest global banks, working across five of the world's major financial hubs: Sydney, New York, Singapore, Auckland, and Tokyo.

His more than 20 years of experience spans market borders and asset classes, covering global equities, commodities, options and futures. Andrew's wealth of trading experience and ability to communicate with traders of all levels has put him in demand as a first point of contact for clients and the media alike when seeking information and guidance.