The Euro spiked today from Draghi commenting that the Euro members will do what it takes to keep the Euro together. This has been interpreted by the markets as a buying of Spanish debt and lax ramifications for Greece not meeting its bailout conditions. I think fundamentally this will cause a weaker Euro and is not a good reason to be piling in. As discussed earlier the amount needed for a full bailout of Spain is much more than the current balance of the EFSF can sustain, requiring more measures to be taking, including simulative measures, to flood the zone with cash and increase liquidity. This will bring about a decline in the Euro which will be welcomed by the major exporting countries such as Germany.
Today may be a fierce combination of covering shorts and rushing in for quick gains, but I would look at this as a temporary move until more substantial measures are taken.
There is a lot of talk about the Spain requiring a bailout and the moves this morning in the EUR could possibly be in anticipation of this occurring (little other news warrants a risk on move). The quickest and easiest explanation of how the EU would provide that bailout is through the EFSF, though fundamental changes would have to take place if that were to be the route to a bailout of the Spanish government. The amount of cash needed would much greater than what is left of the €440bln fund, even by the most optimistic estimates. Without further reasoning to the rise in the EUR this morning it seems nothing more than another opportunity to short.
This week consists of another pivotal week for the global markets. With the Greek government giving a report on the current progress of austerity and cuts that were part of the agreement of the recent bailout, many think it is likely to disappoint. The rest of the week will see increased speculation of further QE measures out of the US a well, though I think that the August 1st report on US growth will be the biggest factor in market participants’ outlook for more QE in the near term.
As stated in the notes for the New Normal strategy the run in commodities did not prove to be a result of stimulus anticipation and there could be more downside as the markets take Europe back into account. However it could very quickly (a matter of weeks) turn into a stimulus trade as the worrying news both domestic and abroad comes out.