The rocking and rolling of sentiment driven by Europe at the moment is enough to give one a headache and to make you seasick all at once. And why wouldn't it? For what seems like an eternity there has been a philosophical war between the Keynsians and the pro-austerity crowd which like all arguments of philosophy doesn't see a lot of ground being given up by either side. My feeling though is that of late the market (by which I mean nearly all of them) feel really tired. All is not lost though as you can see below:
This is my favourite chart at the moment - and whilst it looks like it has way too many indicators on it, the story is really simple. The blue lines simply show the 200 day moving average and then standard deviations at +/- 1.25 and 2.25 standard deviations. What I would suggest this chart shows is the fact that oil has been in little more than a huge range-bound oscillation for about the last 12 months. You can see this not only visually (think support and resistance) but by noting that the volatility bands are tracking in an almost horizontal fashion parallel to the 200 day moving average. Whilst there is a strong short-term downtrend going on, if it is arrested at these levels then this looks likely for some bullish mean-reversion trading. At these levels too, look for any hint of OPEC intervention because prices are likely to become very sensitive.
"I don't see total debt liability as long as I live" was the latest in a string of market inspiring words attributed to German Chancellor Angela Merkel. Not to suggest that the Chancellor is necessarily wrong but it seems to only be adding more uncertainty fuel to an already raging blaze. I suspect that most market watchers are keen for Europe to move beyond rhetoric and economic standpoints and put forth a plan of action - no matter which method they choose there will be a swag of critics but an interminable series of meetings will generate even more. On the plus side though the latest plan sent up the flagpole by the EC is only 7 pages long - down from the original 10. The downside is there isn't an implementation schedule attached so we will have to wait until the close of the conference on Friday (Europe time) to see what they come up with. Not that anyone would doubt that time is of the essence but I thought this in the AFR this morning referring to Greece was particularly concerning - "Overall, government income fell by €1 billion, from €19.9 billion last year to €18.9 billion. Receipts from personal income taxes rose slightly, but not enough offset the drop in corporate receipts, property taxes and “other direct taxes”, which fell to €816 million from €1.4 billion last year." This would show one of the big issues with trying to cut spending and save your way out of a problem - as a government at least. Better yet a good quote from Paul Krugman's blog says it another way:
"And that’s the role of fiscal policy: its goal is not to stop aggregate deleveraging — the public sector doesn’t have to run up debt as quickly as the private sector runs it down — but to slow it down to a pace that can be accommodated by monetary policy.
The point is that if you don’t do that, and also foreswear unconventional monetary policies, you may feel that you’re being all virtuous and sound in your policies, but you’ll also be perpetuating a depression.
So there’s the answer to anyone who declares that it’s stupid to think that more debt can help a problem caused by too much debt. And who knows — maybe someone will even listen. Stranger things have happened."
Unlike the oil price the EURUSD has much more direction about it - you can see the trendline I have drawn and the 200 and 50 day moving averages all pointing lower. The bounce down off the volatility level around 1.2740 was the last significant confirmation of the trend so taking mid-term long side positions would be a tough ask at this stage unless you were supremely confident of a quick and concrete resolution to the European problem.
Interestingly enough, there are lots of people on the record saying that if you follow the Euro union 3 step (1 Fiscal Union, 2 Banking Union and 3 Political Union) the whole problem could be solved. Everyone will certainly be hoping that at least one of these can be solved this week if for no other reason than to provide confidence that the situation can at least improve.