May 31 Daily Market Review
Financial Market Overview
Following a rare rally on Tuesday, equities crumpled by 1% yesterday as a fresh wave of European problems made anxious investors seek the sanctuary of safe-haven assets. Analysts summarized Wednesday’s trading action by stating that the Markets were being held hostage by Greek and Spanish debt contagion. They also advised that risk aversion was the dominating trend at present placing equities and commodities under a severe bearish stress. As a direct result, the 10-year US Treasury yields plunged to their lowest level in 60 years and the EURUSD fell to a 2 year low by breaking beneath 1.2400. The markets grew increasing nervous yesterday as the 10 year Spanish bond yields inched closer the psychologically important 7%, which is the level that triggered Greece to first apply for its bailout loan.
Just as distressing is the prospect that Spain may well have to publish further bonds in an attempt to liquidate its troubled banking sector despite the fact that it can ill-afford to do so. The menace of the ‘dreaded domino’ effect again surfaced its ugly head on Wednesday when, for the first time since January, 10 year Italian yields spiked above 6% causing European shares to plunge by 1.7%. Earlier on Wednesday, stocks and the EURUSD did, in fact, rally after the European Commission issued a plan to boost growth and calm its banking structure. However, any hopes of a respite were quickly erased after news hit the wires disclosing increasing support for the Greek left-wing party SYRIZA, a major antagonist of the current austerity policies. The future of Greece as a Eurozone member now hangs in the balance awaiting the 17th June election results. Elsewhere, US data releases were also gloomy after figures registered a large 5.5% decline in foreclosure sales during April intensifying concerns that the US housing sector was still deeply underwater.
The pair continued its almost vertical descent by shedding almost 120 pips after plunging below the 1.2400 level. This endless descent seems almost unstoppable with the EURUSD dropping 21 times in the last 26 trading sessions losing almost 900 pips in the process. Even the rallies that did occur during this period tend to be ‘dead cat bounces’ providing improved opportunities to renew selling bids at better discounted prices. Is there anything that is capable of at least stalling this powerful bearish trend when a constant stream of depressing European news is the prominent driver? This is where the release of the all-important US non-farm payroll on Friday could take on an important role. This is because a further worse-than-expected result could prompt the Fed into rapidly instigating new stimulus policies. Such a move would have the effect of devaluing the USD providing a welcome breather for the Euro. However, with such an outcome highly speculative the directional movement of this pair is dominated by an overpowering bearish bias. As such, consider selling the pair if price drops below 1.2348.
The British pound suffered badly at the hands of the USD yesterday by plummeting over 110 pips to 1.5485 hitting its lowest level since mid-January. During May, the pair has practically been trading an almost vertical descent losing over 800 pips in the process. Of striking importance is that the faster 50MA (blue) is converging towards the slower 100MA (green) preparing for a crossover which would announce the birth of a new bear trend. This development implies that the May drop could just be a precursor for a much more extended drop usually associated with the full lifetime of a GBPUSD bear trend. In addition, the rising ADX readings displayed at the very bottom are indicative of a trend increasing in strength. In summary, as the GBPUSD is confounding a serious drop in value, the pair is dominated by a strong unrelenting bearish sentiment. As such, sell the pair if its value drops beneath 1.5464.
The Australian dollar performs well against the USD during times of global economic growth but is prone to significant weakness when political and economic uncertainties are prime drivers. As such, the AUDUSD slumped by 1.2% on Wednesday hitting 0.9705 on route for a 6 months low at 0.9690. This movement was caused partially by the worse-than-expected Australian retail figures indicating that the nation’s economic recovery was faltering and justifying the recent larger-than-expected cut in interest rates. In addition, the USD continued to strengthen further in its mode as a safe-haven asset in response to the endless stream of negative news pouring continuously out of European. As there appears to be no miracle solution in the offering to resolve Greek political uncertainties or the Spanish troubled banking sector, a powerful bearish bias prevails over the directional movements of this pair. Consequently, consider selling the pair if price can achieve a sustain break below 0.9698.
The ever-strengthening US dollar wiped the floor with the CHF on Wednesday as the pair surged over 75 pips hitting levels not seen since February 2011. This movement was caused not only by the USD benefitting from the European chaos but also because the Swiss National Bank (SNB) capped the CHF against the Euro last September. The SNB undertook the action to prevent the CHF appreciating significantly against the Euro by placing a cap at its 1.2000 level in order to restrict investors from using their currency as a safe-haven asset. Swiss officials were concerned that such actions would stimulate the double threats of deflation and recession if left unchecked. Consequently, as the Greek and Spanish dramas unfold the USD is attaining more attention as a safe-haven sanctuary than the CHF. With such a strong bullish sentiment acting as the primary driver of USDCHF price action, look to activate a new CALL currency option using this pair as the underlying asset if price climbs above 0.9746.
Gold produced quite a performance yesterday by first tumbling in price earlier in the session only to stage a dramatic recover later in the day by rising over $30 per ounce. The precious metal fell initially in unison with riskier assets, hit a major technical support and then gained a serious bid as a safe-haven asset driving its price into positive territory for the day. Analysts explained this dramatic movement by advising that investors were finally coming to terms with the fact that there are simply no quick solutions for the European debt crisis. This fact implies that Gold should gain serious support especially if the problems in Spain and Italy go completely out of control. As the possibilities of such dire events are quite likely, look to buy gold if its price breaks above $1,568.02 per ounce.
Oil slumped by 3% yesterday over concerns about falling demand from Europe and China. With such a bearish sentiment presiding over this commodity, consider selling it if its price drops below $87.00 per barrel.
GlaxoSmithKline Plc announced on Wednesday that it intends to instigate steps to produce a new board for Human Genome Sciences using its own nominees as part of a $2.6 billion plan to acquire the US biotech company. GSK indicated the possibility of such a development earlier in May within a regulatory filing. This new action should emphasize to shareholders and other interested parties that GSK is very serious about purchasing Human Genome.
After the Gores Group abandoned its $791 million bid to acquire Pep Boys, the shares of the auto parts company collapsed by as much as 25% yesterday. The Gore Group had already attempted to delay closure earlier in May after its due diligence had unearthed significant declines in Pep Boys’ income and profit streams as well as detecting a serious covenant breach.
Apple bucked the trend yesterday with its shares appreciating by 1.21% to close at $579.17. This positive movement resulted from Apple Chief Executive Tim Cook advising the markets that there was ‘intense interest’ in the company’s plans to develop a revolutionary itelevision. Following such a positive marketing event, consider buying Apple if its price breaks above $579.74.
In contrast, Google shares fell in unison with the general markets finishing the day at $588.23 after registering a loss of 1.03%. Look to sell this company’s shares if their price plunges below $587.70.