May 17 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
In a dramatic move made yesterday, the European Central Bank stopped its operation to supply liquidity to an undisclosed number of Greek banks. Internal reports stated that the reserves of at least four major Greek banks were so depleted that they were only able to function using negative equity capital. Investors are now becoming increasing worried of a ‘doomsday scenario’ which could evolve from a serious run on the Greek banking sector sparked by the exit of Athens from the Eurozone. Worrying signs are already emerging as Greek citizens started to withdraw Euros yesterday from their bank accounts in fear that a devalued Drachma may soon be reintroduced as the nation’s currency. Should such a sequence of events happen, then the dreaded domino effect could take hold causing contagion to rapidly spread to banks in Spain and Italy. A potential stock market crash could then be in the offering because of the substantial global exposure to these parts of the world.
Against this depressing backdrop, good US data were released yesterday indicating that although the US economy was not in full swing, it was still churning its way forward in a positive direction. The Commerce Department announced that housing starts rebounded in April rising by 2.6% to an annual rate of 717,000 units. In addition, the US Federal Reserve issued a report advising that the production from factories, mines and utilities increased by 1.1%, which was the largest improvement recorded since December 2010. This welcome news dampened fears of a US economic slowdown that had been quite prominent since the posting of the disappointing labor report two weeks ago. Analysts are now predicting that the US economy will expand by a 2.5% annual rate during the second quarter despite that the 2.2% initial estimate for first-quarter growth may be reduced to below 2% later in May.
Although the Euro managed to hold its own yesterday against the USD, this may just be a brief respite before its resumes its downward trend. Just how far can the EURUSD potentially drop is the burning question? A long-term chart is presented below as a means to provide a plausible answer. The bearish trend displayed on the chart commenced in late August 2011 and strongly suggests that the EURUSD has more weakness in store. A projection of the black lower trendline eventually hits 1.1900 and the pair is predicted to drop to this value in about 2.5 months unless corrective action is taken to resolve the European debt crisis. Such an eventuality seems unlikely at the moment with power shifting from the world banks, which instigated this problem, and politicians, who have failed to solve it, to the general public. As such, the EURUSD is on course to break below 1.2000 by the end of July 2012. With that sobering thought in mind, the pair, without question, will be primarily influenced by a strong bearish sentiment in the near future. If price is able to break below 1.2660, then look to open a new PUT open with this pair as its underlying asset.
The Bank of England issued its Inflation Report on Wednesday which contained some grim reading by stating that UK growth prospects were ‘unusually uncertain’. New lower growth forecasts were published as a consequence. Also, the BOE advised that its predicted drop in inflation to 2% had not been achieved as this parameter had remained stubbornly higher than expected. Analysts are now advising that the prospects of further quantitative easing have seriously increased which will undermine the strength of the British pound. The BOE chairman cited the chaos in Europe as the primary reason for this depressing outlook and even foresees an increase in the risk of a ‘disorderly’ euro outlook’. With the GBPUSD falling further yesterday as a result of these developments, consider selling the pair if its price plunges below 1.5880.
The AUD has lost its battle with the USD to sustain its parity level as the AUDUSD plunged as low as 0.9869 before rallying to 0.9910 yesterday. The AUD is weakening as a result of problems with the Australian economy, the Chinese economic slowdown, the deteriorating situations in Greece and the troubled Spanish banking sector. In particular, as Australia depends heavily on its exports to China, which is its number one trading partner, it is very vulnerable to any signs of lower Chinese industrial production or falling housing and energy data. The increasing possibility that Greece will be forced out of the Eurozone also undermines the strength of the AUD because it is a high risk commodity currency. As these problems will most likely intensify in the near future, the resultant bearish sentiment will cause the AUDUSD to weaken further. As such, look to open a new PUT currency option if price drops below 0.9860.
Although the CHF managed to stall the relentless climb of the USD yesterday, this should only be regarded as a rear-guard action. The USD, as a safe-haven asset, will continuously benefit from any further deterioration in the European debt crisis over the coming weeks. If developments keep occurring such as yesterday’s one in which the ECB stopped its liquidity support to certain Greek banks, then the USDCHF should surge higher seeking its yearly high at 0.9593, which it achieved on 8th January 2012. The rising values of the ADX, the trend strength indicator are also supportive of this upward movement. With a strong bullish sentiment presiding, look to buy the USDCHD if its price achieves a sustain break above 0.9460.
Gold plunged to a 2012 low yesterday by hitting 1531.10 per oz before rallying later in the day to close at $1,536.60 per oz following news that France and Germany will attempt to instigate plans to keep Greece as a Eurozone member. The value of the precious metal has now fallen by 20% from its September 2011 high which is indicative that gold is trading a substantial bearish channel. Consequently, consider activating a new PUT commodity option using gold as its underlying option if price continues to slide below $1,530.90 per oz.
Oil prices fell again yesterday following the news of the serious plight of Greek banks which caused an increase in risk aversion. With a strong bearish sentiment dominating oil trading, consider selling this commodity if its price plunges below $92.42 per barrel.
Shares in Samsung Electronics fell by more than 6% yesterday after reports from an online trade news website informed the markets that Apple had preferred to place an extensive mobile DRAM chip order with one of Samsung’s main rivals, Elpida. This development immediately reduced Samsung’s worth by almost $10 billion. Inside sources advised that as the shares of the company were already under severe stress after investors sought other risk aversion options, this new Elpida episode was finally enough to cause the massive sell-off yesterday.
Investors grew worried on Wednesday about the size of its potential losses after the distressed Spanish bank, Bankia, announced that it was delaying the release of its Q1 results, a move that caused its shares to plummet by 10%. Bankia was nationalized last week because it is unable to cope with losses emulating from the 2008 property crash. This development vividly illustrates the scale of the troubled Spanish banking sector.
Apple shares fell yesterday by 1.28% to close at $546.08 per share although Google’s shares rose for the second day by 2.92% to finish at $628.93. Despite Google’s encouraging performance, the stock markets are dominated by a bearish sentiment. As such, look to sell Apple shares if its price slips lower than $541.59 and consider selling Google shares if their price plunges below $627.16.