Fears, not previously expressed in market pricing, that the Euro-Zone could be set for a return to the familiar post-war era of Italian instability are at risk of being realised in the coming hours. Whilst the centre left Democratic Party of Pier Bersani looks to have secured sufficient votes to rule the Chamber of Deputies (lower house), the Election outcome in the Senate (and who have equal say in policy matters) is too close to call based on incoming poll results, as I write this update. The nightmare scenario of a Bersani-controlled Lower House and a Senate effectively controlled by former Prime Minister Silvio Berlusconi is being rapidly priced into the markets. This is most evident in the drop in Euro/USD which had a key day reversal yesterday. The irony with the drop in the Euro is that funds are flowing into Sterling despite the UK being downgraded by Moodys last Friday. Italian Bond yields will spike higher today as there is every reason to take the Italian election results seriously. Given that the source of a return to political instability in Italy is a party who campaigned on an anti-austerity and in effect an anti-Europe platform, it is hard to see just how ECB President Dragi’s ‘to do whatever it takes pledge’ with respect to preserving the sanctity of the Euro can extend to writing a blank cheque in favour of the Italian Fiscal Authorities. Markets will remain transfixed with the incoming political news from Italy today.
This morning on the Economic front we have UK CBI reported sales, whilst later in the US we have Consumer Confidence, House Price Index, New Home Sales, Richmond Fed Manufacturing Index and finally most importantly Bernanke testifies at the Senate Banking Committee.
March S&P 500
Wow what a day! Yesterday was the first key day reversal in quite a while as the S&P traded straight up to my 1521/1525 sell zone with a 1524.5 high shortly after the New York open before falling hard to close under 1490. This week has the potential to whipsaw traders as Bernanke testifies before the Senate today and then the House on Wednesday ahead of the release of US GDP Nos on Friday. I went short at 1522 and I took a nice gain on this position at 1500. I then bought the market at 1492 and I will lower my stop to 1483 on this position as I look for a rally ahead of Bernankes testimony this afternoon. The fact that the S&P managed to close below 1490 is bearish but I want to see if we can get a turnaround Tuesday first. I will look to take profit on this long position in front of 1500 and I will look to go short from 1499/1505 in small with a 1508 stop.
March BUND
The Bund worked well as we dropped down to my 142.90/143.20 buy level with a 142.86 low before the market rallied over 150 points off the low. I bought the Bund at 143.10 and I took a profit at 144.00 and I am now flat. As I have been saying, for the last few weeks, not to be short the Bund and finally we saw why yesterday. I still like the Bund and I still look for the Bund to trade up to 145.00. Today I am a buyer on any dip to 143.70/144.00 with a 143.45 stop. I still do not want to be short at this time.
March FTSE
This was the one market that found it hard to rally yesterday when the other equity indices were going crazy. The FTSE just made into my 6360/6385 sell zone with a 6372 high before literally collapsing. The FTSE also had a key day reversal yesterday as it made a new high above Friday before falling hard and closed on its low. I went short at 6360 and I took profit at 6280 for a really nice gain. I did not buy the market as I was already long the S&P and I am still flat. Today I am a seller on any rally to 6280/6310 with a 6330 stop. I do not want to be long at this time.
Euro/USD
I am glad that I took the view yesterday that I should be flat the Euro ahead of the election result in Italy as I always feared that Berlusconi would reappear with a vegence. The Euro also had a key day reversal as we made a new high over 1.3300 before trading down to 1.3050 before the New York close. The Euro is now oversold and today I am a buyer in small from 1.3020/1.3050 with a 1.2990 stop. I am only interested in going short on any rally to 1.3170 with a 1.3205 stop.
GBP/USD (Cable)
Cable just missed my buy level before the market rallied as traders switched from the Euro ironically back into Sterling despite the Moodys downgrade on Friday night. Cable is still way oversold and today I am a small buyer from 1.5090/1.5130 with a 1.5070 stop. I do not want to be short at this time.
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