Archive for December, 2011

ECB’s Balance Sheet Leans Bearish For Euro

Friday, December 30th, 2011

When the ECB is expanding its balance sheet relative to the Fed’s balance sheet, the blue line falls (see chart below); under those conditions, the red line shows the euro tends to be weak vs. the U.S. dollar. Chart from

Fed's balance sheet relative to ECB's balance sheet

Obviously, if the Fed announces another round of QE, the blue line’s bearish trend can be reversed quickly, which would exert downward pressure on the greenback. We noted on December 29 some reasons to remain open to a euro bounce and some levels to watch.

Is The ECB Trying To Cap Italian Yields?

Friday, December 30th, 2011

It sure looks like the ECB is trying to cap the yield on an Italian 10-year at 7%; see the “resistance” in the green box.

Yield 10 Year Italian Bond

Yields are sitting at one month highs, which hardly looks like a bond market that is convinced the situation in Europe is under control.

PIMCO: European Bonds ‘Toxic’

Thursday, December 29th, 2011

It is interesting when a firm as well entrenched as PIMCO uses terms like “toxic”. From Bloomberg:

European government bonds with the exception of German securities are today’s “toxic debt” as the region struggles to contain fiscal turmoil, according to Pacific Investment Management Co.’s Tony Crescenzi. The European Central Bank isn’t likely to follow the example of the Federal Reserve in purchasing government bonds to keep interest rates low, said Crescenzi, executive vice president at Newport Beach, California-based Pimco, in an interview today on Bloomberg Radio with Sara Eisen. The euro is likely to remain weaker, according to Crescenzi.

ECB’s ‘Temporary’ QE Floods System With New Cash

Thursday, December 29th, 2011

The ECB has flooded the European banking system with newly printed euros via their three-year loan program. We may become buyers of gold and silver in the coming weeks/months based on the explosive growth of the ECB’s balance sheet - click here for a Wall Street Journal chart dating back to 2002.

Silver (SLV) H&S Target Hit

Thursday, December 29th, 2011

On December 13, we noted a bearish head-and-shoulders pattern in silver and stated:

If SLV fails to retake the neckline, a decline toward 26.40 could be in the cards.

Here are the “BEFORE” and “AFTER” charts for SLV:

Head and Shoulders Pattern Technical Analysis - Silver

Signs Of Credit Crunch In Europe

Thursday, December 29th, 2011

Despite “easy money” policies, credit growth in Europe came in well below expectations. From Reuters via Zero Hedge:

Loans to private sector firms in the euro zone fell in November while growth in lending to households slowed, European Central Bank data showed on Thursday, adding to the case for an interest rate cut. The drop in funding to companies increased fears that the region faces a looming credit crunch, an issue of growing concern for the ECB as the worsening sovereign crisis makes firms and households increasingly wary about taking on debt, weighing on the economic outlook.

In an attempt to kick-start loan activity, the 17-country bloc’s central bank conducted last week its first-ever three-year funding operation, which saw banks take up almost half a trillion euros.

In November, loans to the private sector grew at a rate of 1.7 percent year on year, Thursday’s data showed, coming in well below analysts’ expectations of 2.6 percent and the 2.7 percent growth seen in October.

“They are a very soft set of numbers, Societe Generale economist James Nixon said. “If banks were to start to seriously shrink their balance sheets, that would be quite a significant negative for economic activity. The good news is we don’t see that - yet.”

The flow of loans to firms dropped by 7 billion euros after growing by a similar amount in October. The flow of mortgage loans rose by 8 billion euros after an 18 billion drop in October. The annual growth rate of mortgage loans remained at 3.0 percent.

Euro zone M3 money supply — a more general measure of cash in the economy — grew at an annual 2.0 percent in November, down from 2.6 in October and below expectations of 2.5 percent. Decreasing to 2.5 percent, the three-month moving average of M3 growth remains well below the ECB’s reference rate of 4.5 percent, above which the bank sees dangers to medium-term price stability. Economists said the figures made it more likely the ECB would look to offer the struggling economy more support by cutting interest rates further from their current record low of 1.0 percent.

“The sharp slowdown in euro zone money supply growth in November reinforces belief that underlying euro zone inflationary pressures are easing and that the ECB has ample scope to cut interest rates again in the early months of 2012,” IHS Global Insight economist Howard Archer said in a note to investors.

The Independent reported:

AN unprecedented €40bn of deposits was withdrawn from Irish banks in December, dwarfing the flight in deposits earlier in 2010. December’s massive deposit exodus means a total of almost €110bn has been taken out of Ireland’s 15 retail banks since the start of 2010.

Euro’s Action In Coming Days Important

Thursday, December 29th, 2011

All the details of Thursday morning’s bond auctions in Italy can be summed up via the yield on 10-year Italian bonds. Despite what some are terming a “successful” bond auction, the yield on the 10-year is rising today; it sits above 7%. The significance of rising yields in Italy is explained at the 13:30 mark of this December 18 video.

Falling in line with Italian bonds, the euro is making new lows again on Thursday morning. As we mentioned Wednesday, we plan to exercise some patience with all positions until we see if the euro continues to drift lower. A good line in the sand is 127.07 on the euro ETF (FXE); a drop below that level would move us closer to deflationary/bearish posturing in the short-to-intermediate-term. If FXE holds above 127.07 and can retake 130.29, we would become more bullish on stocks and bearish on the U.S. dollar (UUP).

CCM Short Takes

In the daily chart above, notice the MACD histogram shows a somewhat tepid move lower, similar to the period near the October low in the euro. We are not bullish on the euro, but we want to see how things play out over the coming days. It would not be surprising to see the euro experience a big move, up or down, in the coming weeks.

Euro Holds Key For Stock Rally

Wednesday, December 28th, 2011

The best way to monitor the sustainability of the current push higher in stocks (SPY) is to keep an eye on the euro and U.S. dollar. The correlation between stocks and the euro has been strong in recent months. In the current environment, when the euro strengthens, stocks tend to come along for the ride.

On Wednesday morning, the euro made a new low (see below). If the euro fails to recapture 129.87 in the coming days, it may signal another round of weakness for stocks and commodities.

CCM Short Takes

The weekly chart of the euro is telling us to keep an open mind about the possibility of a snap back in the euro. The euro has clearly made a lower low (see downward sloping red line below), but the technical indicators (ULT and MACD histogram) have made higher lows (see green lines top and bottom). The divergences between price and the indicators may be indicative of a weakening desire to sell the euro (emphasis on may).

CCM Short Takes

Since ETFs are a little easier for the average investor to follow, we will focus on the euro and U.S. dollar ETFs below. If the euro ETF (FXE) fails to recapture 129.34 in the coming days and weeks, it will lean bearish for stocks and commodities.

CCM Short Takes

Looking at ETF volume, we see above average interest in the U.S. dollar. Since volumes are light this week, we will use the S&P 500 ETF (SPY) as the baseline. SPY has traded 46 million shares as of 11:30 a.m. ET on Wednesday, or roughly 19% of a typical full trading day. UUP has traded 77% of a typical day’s volume; FXE 45%.

As outlined on December 18, we do not believe the European Central Bank’s (ECB) three-year loan facility represents a long-term solution to unsustainable levels of debt in Europe. With ten-year Italian yields still hovering around 7%, the bond market is skeptical of the ECB’s “back-door bazooka” as well. Since the December 19 low, stocks have turned a blind eye toward Italian yields. If the U.S. dollar ETF (UUP) can retake, and hold above, 22.62, it would add to our concerns about the sustainability of the recent push higher in stocks. Conversely, if UUP drops significantly below 22.62, it will increase the odds of stocks pushing higher over the next few weeks.

CCM Short Takes

Europe: Good News and Bad News

Wednesday, December 28th, 2011

The good news is Italy had a relatively successful short-term bond auction this morning. Bidders paid 3.25% in today’s auction for six-month Italian bonds, or roughly half of the cost of the November auction. A bigger test will come Thursday when Italy auctions three-year bonds. We believe this week’s auctions are being managed closely via pressure from the ECB for banks to participate. A better indication of demand for Italian debt will come in the next 30 to 60 days.

The bad news is the funds banks borrowed from the ECB’s three-year loan facility have been parked back at the ECB, rather than making their way into the real economy. From the Wall Street Journal:

The European Central Bank turned the fire hose on the euro-zone banking system last week. The fire is still burning, but the liquidity has simply returned to flood the ECB’s basement — at least for the time being.

The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday, up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion.

Use of the deposit facility is frequently seen as an indicator of stress in the financial system, but the latest surge probably doesn’t reflect any deterioration in the situation since last week. “This is just a mirror image of the liquidity that the ECB is pushing into the system,” said Jacques Cailloux, chief euro-zone economist at Royal Bank of Scotland in London.

From Reuters:

Despite the recent massive liquidity injection by the European Central Bank, banks still appear to distrust each other and prefer to deposit their money at the ECB’s overnight facility than lend to each other.

Latest figures show banks deposited 452 billion euros ($591 billion) at the central bank. Emergency overnight borrowing also remained high at above 6 billion euros.

“This really highlights the reluctance banks have to lend to each other and they would rather take a small loss than go to the inter-bank market,” IG Markets dealer Chris Weston said.

S&P 500 Holds Friday’s Break-Out

Tuesday, December 27th, 2011

Nothing new today: Still believe S&P 500 may make a push above 1,284 during the next week or two. Given what we know today, any gains will most likely be short-lived and retraced sometime early in 2012. Our somewhat neutral stance will allow us to monitor developments with an open mind in the short-to-intermediate-term.

SPX CCM Short Takes