No Change - No Joy
Research for Online Investors

8/02/12

The FOMC didn’t announce QE yesterday, the market reacted negatively.  They did change their economic observation from the U.S. economy is growing slowly to deceleration.  This morning, the Bank of England kept interest rates at 0.5% and did not add to their quantitative easing program.  That leaves the European Central Bank.  No change in their interest rates either.  The market reversed from 20 points positive in the pre-market to 80 points negative in a few minutes.

The White House released information that President Obama called Italy’s Mario Monti on Tuesday and France’s President Francois Hollande yesterday to encourage “decisive steps” to solve the eurozone debt crisis and support the euro. The president told contributors at a $40,000 per plate fundraiser in New York City that “I am spending an enormous amount of time, trying to work with them.  The sooner that they take some decisive action, the better off we are going to be.”

ECB President Mario Draghi held a press conference after the interest rate announcement this morning.  The market hoped for a dramatic announcement to cap interest rates, a plan to buy bonds directly and in the secondary markets.  We wanted to see determination in Draghi’s eyes!

Draghi did state the ECB “may undertake outright open market operations of a size adequate to reach its objective.”  He even said they may consider “non-standard” measures.  Then he put a dagger through Hollande, Monti and Spain’s Mariano Rajoy’s heart, qualifying that countries would have to accept “conditionality.”

“Conditionality” means the governments would have to request the ECB action and accept the terms of granting the ECB intervention.  This is code for austerity measures, and possible oversight (approval) of sovereign budgets.  In any case, Draghi indicated any ECB action would come in September at the earliest.

As expected Germany held the line on loosening the ECB policy and voted against the plan explained by Draghi.  As the largest economy and contributor to rescue funds, Germany exerts extraordinary influence on the ECB board.  Draghi said the vote was unanimous with one exception and named Weidmann of the Bundesbank as the dissenter.  This violated protocol and was seen as pressure on Germany, or perhaps gave Weidmann cover at home for his conservative stand.

The market looks to be under pressure today.  Tomorrow the Bureau of Labor Statistics releases the Unemployment Rate for July and Non-Farm Payroll jobs added.  Economists expect the addition of 100,000 jobs and Unemployment to hold steady at 8.2%.  We don’t see where the headline news is to rally the market.

Support is at 1348 – 1353, the lower trend line of the bull channel the market has built since the end of May.  From there we will look to 1338 which was the closing price on 7/24.  Again, we don’t know where the good news comes from to turn the market…so hold on.

One trade we can recommend, short the euro.  Draghi said “not to short the euro” during his press conference.  Experience tells us doing the opposite of what central bankers are saying can lead to profitable trades!  It is crowded and subject to volatility, but probably still a safe bet.

Quote:
You have to go back to The Great Depression to find a President whose policies have failed more.---Rep. Jeb Hensarling (R-TX)

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