Fear Begins to Set in

We saw some fear during Sunday night’s fx/futures trading session, however, this morning’s action feels more palpable and panicked to me. Gold has come under heavy selling pressure as the specter of a Greece exit from the euro could lead to contagion and margin calls in European markets. The situation in Europe is unstable because in all likelihood Greece will be gone from the eurozone by August and Portugal won’t be far behind – this creates a situation in which the remaining stronger members will have to bind together much closer than ever before. However, there is tremendous political risk in a closer more federalized political structure particularly given the recent election results. Simply put, Europe needs to come closer together in order for the euro to have a chance of surviving – meanwhile, the latest election results offer real time evidence that Europe is moving farther apart.

To make matters worse the ECB proved last week that it remains firmly behind the curve and yesterday’s op-ed in the FT by Bundesbank President Weidmann was hardly reassuring for markets. My friend Jonathan Eliasof offered an interesting theory as to why the ECB appeared less dovish than expected last Thursday:

“The Fed is indirectly strong-arming the ECB insomuch as the eurozone needs a weaker currency, but that would jeopardize the risk-on trade. ECB accommodation is viewed as euro-positive as the Fed is ahead of the artificial growth/ “FX devaluation” curve. Under this logic, is it possible that the ECB refrained from unveiling new non-standard measures of easing in an effort to devalue the euro?  While this may seem far fetched, it could help explain Draghi’s decision to leave rates unchanged as inflationary expectations continue to abate.”

Jonathan makes a key point: Additional ECB accommodation would be a $EURUSD positive, at least in the near term due to the market’s perception that the Fed is ahead of the ECB in the “devaluation curve”. So we once again find ourselves in a fear driven market environment in which sentiment is quite poor, although there certainly haven’t been many real signs of “capitulation selling” yet. Moreover, as terrible as things seem to be in the eurozone the EUR/USD cross continues to stubbornly cling to the 1.30 area.

For my money I am focused on the 78 level in $IWM and whether or not $ES_F can make a higher low from Sunday night’s low of 1342.50. Good luck and as my friend Frank Zorilla put it this morning: Maybe it is best to do nothing

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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