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Europocalypse Now

Last updated 9/28/2012 4:24 PM EST (GMT -5) 4 Comments

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Spanish Banks Be Stressin’

Is it just me or are we talking about Spain a lot more lately than in the past? Much like nobody gave a second thought to Greek issues unless they were in a college fraternity a few years ago, Spain has become the Eurozone’s new hot button Europocalypse catalyst. Today’s wild ride was courtesy of Spanish rumors, results, and second thoughts.

One of the rumors that was working its way around trading circles was that the Spanish Bank Stress Test that was released today would be MUCH worse than estimates. The estimates for how much more capital was needed for the banking system were ranging somewhere around 60 million euros. However, the doomsday number that the rumors generated was more like 100 million euros. The fear of such a catastrophically awful result sent the EUR/USD and other risk currencies off a cliff.

It wasn’t until the actual stress tests were released that we discovered that the original expectations were more on par, and that seven of the banks surveyed would need no additional capital, making up about 62% of those surveyed. While nobody was waving a flag of victory, the relief rally in risk afterward created a bit of a bump before the market began selling off again.

Another rumor making the rounds is that Spain will be downgraded upon market close by Moody’s. Not wanting to hold the currency of a downgraded country is standard practice in trading, but being that the announcement would be coming over the weekend, investors were bailing early and often.

This brings us back around to the second thoughts. The rally in the EUR/USD and other risk markets yesterday after the Spanish budget unveiling seemed a little weird. The expectations of revenue around which Spain is backing their financial plans are a little audacious. Being that unemployment has risen considerably since the year previous, less people are paying taxes, and more are collecting social assistance; yet Spain expects to collect the same amount in revenue in the coming year.

On the other hand, Spain’s budget fell in line with what the European Council had recommended to them which makes the transition from Spanish authorities to the Troika much easier if (or when) they ever put their hand out to request assistance from the European Central Bank’s Outright Monetary Transaction scheme. 

Regardless, the europhoria that ensued after yesterday’s announcement was likely an anticipation of a request for assistance that didn’t come today, but in which another rumor mentioned that it could be coming this weekend. As it turns out, rumors of downgrades are trumping rumors of bailouts in the EZ as risk continues to sell off in the late hours of trade.

Fitch Affirms UK AAA Rating

The United Kingdom continues to be one of the most highly respected by the rating agency contingent as Fitch decided to affirm the UK’s AAA rating, but listed their outlook at negative. While they kept the rating the same, the negative outlook could give some investors pause.

Within the announcement, Fitch listed some potential scenarios as to how the UK might lose their precious AAA rating. 

A downgrade of the UK's 'AAA' sovereign rating would likely be triggered by the following :   -- General government gross debt failing to stabilize below 100% of GDP and on a firm downward path towards 90% of GDP over the medium-term.   -- Discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast.   -- A material downward revision of the assessment of the UK's medium-term growth potential.

So much like the United States, debt levels creeping higher than 100% of Gross Domestic Product is a troubling trend that the rating agencies are beginning to call out. 

With all of the asset purchases going on in the developed world out of the US, UK, EU, and Japan, warnings of impending downgrades or outright downgrades may become the next thing that destroys the market’s confidence regardless of how much money those country’s central banks throw at it.

Looking Forward

Next week will be an interesting week full of monetary policy decisions that should get us thinking once again. The Reserve Bank of Australia, Bank of England, European Central Bank, and the Bank of Japan all have decisions to make on whether they will try to provide more stimuli for an already skeptical market, or just let things play out a little longer at the status quo.

The cherry on top will be the US Non-Farm Payroll report at the end of the week which will be the first completely scrutinized employment report after the Federal Reserve’s launch of Quantitative Easing to infinity. For a full run down on my thoughts of the week’s upcoming events as well as some technical levels check out my Fundamental Outlook for the Week Ahead .

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Comments (4)

Darkdoji

October 01, 2012 at 02:39 AM ET

I just would like to ask a simple question. When you say the market sold off on account of this or that or rallied on account of this or that - what do you really mean. Are you saying for instance that you know for certain what the motivation was for a given move or you just guessing based on coincidence between event and move. Even more interesting - is the implied theory of market (which is common among market analysts) - that the market is purely driven by rumor and populated by simple minded (almost robot like) reactionaries not able to do more than react to each piece of news on a good = up and bad = down basis (to each and every piece of news day after day by the minute). In this model largest players (my assumption) are scalpers trading large volumes Trillions/week in very limited ranges and in responses to every single piece of news regardless of prior positions. In this market no technical studies apply since no one uses it (only newbies may be) and no one holds any given position for more than a few minutes at a time sometimes seconds given the rate at which news is flowing in? Or how would you model the market you describe to us time and again so we can better appreciate your meaning.

Neal

October 01, 2012 at 07:53 AM ET

Darkdoji,

You pose an interesting question that perhaps many people have though about, but may have been afraid to ask. When I say that market dropped or rose based on events that occurred around the world, I can never be 100% certain that was the case; in fact no one can. However, to say it was coincidence would be ignoring the simple dynamic of cause and effect. When the market moves either up or down, there is usually a reason why it did so. Primarily those moves are news or rumor related, but there are also levels that are hit purely via technical dogma.

You also mentioned something very interesting in your post that "the market is purely driven by rumor and populated by simple minded (almost robot like) reactionaries not able to do more than react to each piece of news", and you are exactly right. In a 2009 report by the consulting firm Aite Group, it was estimated that 73% of all US equity trading volume was transacted through HFT's, or High Frequency Trading robots. Well that was 2009, just imagine how much more volume is now placed through machines that simply look for keywords in reports, specific numbers in releases, or technically significant levels and make a decision to buy or sell "mindlessly" much more quickly than you or I are capable of doing.

Therefore, the market does react very quickly to news events, rumors, as well as technical levels. I feel my job is to tell the story as to why the market reacted in the way it did in an entertaining manner that provides education so the next time a similar event occurs, we know how to react in kind.

Thank you for reading my commentary, and thank you for your well thought out question.

Neal

Darkdoji

October 01, 2012 at 04:08 PM ET

Thank you too for responding in the way that you have. It is a conundrum (how the market works) that I have always been curious about. I believe I have largely cracked it (in terms of a view of the market that allows me to trade it profitably) but I know there are many ways to look at the market and was interested to know in particular how an experienced analyst (and no doubt trader) like you views it. Especially as you have to try to explain things to others. What is amazing is that because the market is a mathematically chaotic system it is possible to explain it in many different ways - right or wrong - and still trade it profitably (since a lot depends on the range one is trading). In my view of the market - I do not need to know why price moved I just need to know where price is headed. Of course after the fact (and being human) these cause and effect type explanations have a place. But in fact and in reality many different people (and now machines) place different types of orders for all kinds of reasons at different points in time and the market does its primary job of aggregating by sign which side (sellers or buyers) have it at any time T. The result usually is tradeable market moves of varying duration - which we try (however which way we know how - to take advantage of). Very interesting though about the robots which I have been reading a lot about lately. Happily they do seem slower and limited in effect in the forex given that there are no xchanges in the forex so that even with high-speed connections access time would still (I think) be relatively slower and strategies probably limited to event type algos. What do you think?

Neal

October 03, 2012 at 06:07 PM ET

Actually, I would say that algos are everywhere in trading, even in the forex environment. Every major desk in the forex realm including brokers, banks, and the exchanges where banks trade with each other are mostly automated. They are constantly calculating algorithms that offset risk, maintain balance of positions, and sniff out predators. Very rarely is a trade placed by a real human being with another human being as they were in the days of open outcry.

Even regular old retail traders are wading in to the algo waters with the incredible growth of Expert Advisors on MetaTrader4, a platform that you have access to here at GFT. So while I write my commentary for those who still analyze charts and make decisions based on their own set of criteria, they too would probably rather come up with some automated system that would do it for them. I mean, who wouldn't want to turn on the computer after a good night's rest, put your feet up on your desk, sip your morning joe, and find out that your system made some successful trades while you were sleeping? Screw the American dream, that is the human dream! Do nothing and get paid for it! In fact, they've been doing it in Europe for years! (Ohhh, low blow?)

So coming back around to the point, you are absolutely correct that the markets move in a mathematically chaotic system, but then again so does everything else, just take a look around you. Every interaction in your life is a mathematically chaotic system unto itself that is an interaction with other chaotic systems. Besides, human beings had to program those robots, so they are just an extension of that person's thoughts, the difference being that they are played out faster than humanly possible.

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.