Euro Rises as Merkel Emasculated

The Euro was expected to bounce as Merkel's move was expected to have a momentary improvement as shorts covered. The Euro bounced, but for a different reason, and one that suggests the Euro has bottomed for the moment. If so, the Euro should begin a bounce of several weeks or months.

What happened this morning? Other countries declined to go along with Germany, and after a brief short covering, everything reversed! It reminds of the moment in Animal House, when John Belushi rushes out of the frat saying "Who's with me? Let's go!" and no one does.

Merkel's move is a bust. Spreads widened when they were supposed to narrow:

Credit-default swaps on Europe’s most indebted governments fell initially on concern the restrictions on short-selling will devalue existing agreements. They erased those declines as it became clear Germany failed to persuade other nations to join in the ban.

Germany largely failed to persuade other nations to follow its prohibition and the U.K. Financial Services Authority said the ban doesn’t cover branches of German institutions outside of Germany, indicating it will have little impact on trading in London, the biggest hub for swaps bets on European government debt. 

Merkel's move now looks like an act of desperation. As Mish comments:

BaFin put the ban on short selling even after it announced that it found “no evidence” that credit-default swaps were being used excessively to speculate against Greek bonds

This explains why ZH's day of chaos never happened. Governments look impotent. London markets are bigger than Germany's, and continue trading with naked shorts. Also, the data simply does not support Merkel's fears - while shorts have increased dramatically, the types of naked shorts she worried about the short positions are not that large and are actually lower than two months ago:

The funniest story is that one of the leading shorts is the Greek central bank, betting against itself! You cannot make this stuff up. How can you take government "regulation" seriously? The banks don't.

So what drove the Euro up? It appears that the ECB and other European central banks are finally intervening:

The massive 200-pip jump in EURCHF in less than 10 minutes (13:00-13:10 BST) is the work of no other than the Swiss National Bank intervening to sell its own currency. But the 80-90 pip jump in EURUSD must also be the work of European banks intervening on behalf of the ECB to boost the ailing euro. The events of the last 2 weeks imply that coordinated central bank intervention is possible. If it took 2 days for the ECB's to make an about turn on bond-purchases and for Berlin to institute a ban on naked shorts, then the prospects for intervention are very plausible

What is troubling is it wasn't a coordinated move, but driven by capital flight from Germany (Euros) to Swiss Franks. In order to manage the conversion, the Swiss bank had to intervene to prevent the Swissie from running up! Ambrose Evans-Pritchard reports that "€9.5bn flowed into Swiss franc deposits in a matter of hours," and this came on top of €56bn interbank loans reflecting flight out of Club Med. 

This means the battle between the wolfpacks and the central banks has now been joined by panic and capital flight, which is the same psychology of May 1931 after Creditanstalt Day. This battle should last at least several weeks - it lasted a month back then - until the central banks lose patience and resources, as the flight overwhelms the interventions. 

Besides going long the Euro, it may be time to short the German bunds (their sovereign bonds). This likely also means the end of the gold rally, which I had assessed a week ago, that the momentary spike of in gold after the Flash Crash may have been a blowoff before a hard reversal. 

It was also my view in the last few weeks that once the rescue attempts were seen to fail, the Euro would bottom and reverse. The failure of the Euro-TARP so far combined with the failure of Merkel's move indicate that the market now accepts that we are done with bailouts and gimmicks. Instead, the PIIGS now have to either fix their insolvency or spin out into their own currency and use devaluation to realign their currencies. This is a foundation for a rebound in the Euro, at least for a while.

It may seem paradoxical that government intervention tends to cause the opposite of what is intended, but that is what history shows. Markets reflect real forces, and government attempts to fix prices or stem tides tends to get overwhelmed as markets find ways around obstacles. This lesson has been learned over and over going back to at least Diocletian's price controls in 300 AD. They failed.

Markets are order-seeking mechanisms within chaotic nonlinear systems. When they find order, they move very quickly, much faster than governments. Governments in contrast tend to be the slowest actor, intervening usually after the trend has exhausted. In this case, the moves to rescue the PIIGS come after they have gotten so deeply in trouble, the rescue simply kicks the can down the road and deepens the insolvency. I do not think any market participant believes Greece will escape default - even the Greek central bank bet against itself! - it is simply a matter of when. Hence the rescue was not seen as solving the problem, just bailing out over-extended banks. 

Once the rescues are dismissed, Euro deflation looms due to debt default. Hence the better bet is not against the Euro but in favor of deflation. Right now it is not clear that the market has come to that realization; we seem to have a momentary bump due to intervention and capital flight. How long and strong the bounce will be probably depends upon short-term intervention vs. long term belief in deflation, and a timing arbitrage as to whether one can jump and get out before the bonds default. 

If we remain in the Creditanstalt Month of capital flight and panic, this bounce could be short-lived. The world may seem a lot more complex and sophisticated than back then, but the psychology remains the same. Human nature does not change. Nor does government psychology. Adherence to the Euro today is acting like compliance with gold then. The parallels are striking.

My conclusion is of a near term bounce followed by a further collapse - it is after that deeper bottom the deflation expectation will emerge. Neely concurs, and put out a call to go long mid-day today. He sees the Euro in a large triangle (of course). Today's STU also sees a major move back up in the Euro, especially because sentiment has become very bearish (98%). Depending on wave structure, this is either a relatively short ABC correction, or the start of a multi-month move. More from them as the pattern reveals itself. 

In the longer run, however, the Euro may be doomed. It is a flawed currency, since it is not backed by control over fiscal policy. A lot of ink is being spilled on this in the blogosphere. EWI commented on this five months ago and their comments are worth reading (below the fold):

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What's To Become of the Euro?
Before his death in 2006, University of Chicago economist Milton Friedman famously predicted that the euro would not survive its first economic crisis. He later backed off that prediction somewhat, but the ongoing bear may yet prove his initial forecast correct.

The Elliott Wave Financial Forecast offered a socionomic rationale for our forecast back in May 2005: "The euro is a currency managed by a group of trading partners who have been historically distinct if not involved in warring with each other." By itself, the fact that 16 countries could put aside their differences to manage a common currency speaks to the magnitude of the erstwhile bullish mood. The size of this ongoing c-wave, however, will bring that cooperation to an end.

Cracks are surfacing already. The binding characteristic of the economies of Portugal, Italy, Greece and Spain--aside from their derogatory moniker, The Four Little PIGS--is that each country is a full-fledged member of the euro-zone. Eastern-bloc nations, in contrast, merely peg their own currencies to the euro, and authorities could easily remove the link at any time. This means that economic pain in Southern Europe influences the euro's perceived safety to an even greater extent than Eastern Europe's woes.

And, to be sure, Southern Europe will destabilize as Primary wave 3 gains traction. The five-down, three-up structure of the region's equity markets since 2007 argues unequivocally that more weakness lies ahead. In early December, Fitch downgraded Greece's debt rating after the FTASE Index plunged 25 percent from its October 15 high. Greece is the first country in the 16-nation euro zone to fall below single-A status, but it surely won't be the last. S&P has already downgraded the credit outlook for Spain to "negative," and this is only the beginning of the move lower.

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Comments

[Kcinley]

Mr. Yelnick,

At this point, what are your thoughts on physical gold and silver?

[Roger D.]

Asia is starting to look ugly. Will it continue? If so should get another break.

[Mr. Panic]

It seems like a lot of people are expecting a bounce today. I am expecting a mini-panic day in the next few days. (most likely tomorrow). McClellan Oscillator has now dropped to -327 reading today and approached the flash crash reading of -370. As in April 2000, the McOsc. should exceed the level of the flash crash reading (April 4 in 2000) on this leg down and it will take very negative breadth readings to exceed that level (most likely a 90%down day). I don't see how the McOscillator would reach this level (-327) and suddenly turn around without reaching a new low. There is also a consistent 43-44 trading day cycle that comes into play right around here. This cycle has market the March 2009 low,May 2009 high,July 2009 low and January 2010 high with a few misfires or muted cycles. Another reason I have focused on May 20 as a key date. There is also a similar technical signature seen at Oct 1987 high,Feb 2007 Nikkei high,2009 Shanghai high, Jan 2010 high, April 2000 top that points to the decline continuing into the end of the week. (or a chop sideways but that would have required a rally earlier in the week.) Some have also noted a similarity of this week to the week of October 10, 2008.
There seems to be an eerie calm in the blogosphere. I don't see any calls for SP 800 or 900 that were prevalent during the Jan selloff.
There was also one index that did break its flash crash low today intraday.

[Wave Rust]

Duncan,
Duncan

Must read interview with Germany's Volker

He's being brutally polite about how bad the EuroZone 'provincial governments' have screwed up the original set of rules.

Maybe the next real crisis in Europe is a vote of no-confidence in Merkel's gov't. Just at the right time or the worst time.

Angela "Let'em eat struedel" Merkel

Never fade the struedel maker

wave rust

[Mr. Panic]

I just made my rounds around the blogosphere after my last post and I can't believe how many posts I have seen that have indicated that the market bottomed today. Some covered shorts/ some talking about high put call ratios low trin readings, market bouncing off 200day average,McOscillator too low, justifying their bullishness. Then I got an e-mail from a subscrib service saying a short-term bottom was put in. (this one does scare me).
I am starting to feel very lonely. And this was just a small sampling from a few sites.

[Gleen Loser Neely]

WE FINALLY GOT RID OF DG!!!

HE IS GONE FROM THIS BLOG!!...

I BET HE IS BROKE AGAIN!!!

JA JA JA....

I WONDER IF HE KEEPS PAYING HIS SUBSCRIPTION OF GLENY NEELLY "THE LOSER"...

GLN

[yelnick]

Kcinley - gold may have peakedl

[yelnick]

Panic - market is poised for the next leg down. Stu count is either we fall now or after a bc to end an ABC wave ii

[Mamma Boom Boom]

Ladies and gentlemen: I believe we are witnessing a successful test of the May 6th low. I now have 4 short term buy signals, which is in addition to other obvious signals.

"Rock On"

[indy]

Panic - market is poised for the next leg down
Panic - market is poised for the next leg down
Panic - market is poised for the next leg down
Panic - market is poised for the next leg down
Panic - market is poised for the next leg down
Panic - market is poised for the next leg down

LOL

[Dow Predator]

The Dow is a strong buy at today's lows. (10,116, so far)

With 99% negative breadth, we are seeing a selling climax.
Today's low so far is a nice 78.6% retacement from tbe May 6 low.
And we have a nice double zig zag to the downside complete.
The McClellan oscillator reached -420.....
Get ready a wild rally is due.

Dow Predator

[Mamma Boom Boom]

>Ladies and gentlemen: I believe we are witnessing a successful test of the May 6th low.<

The most likely path from here, is a rally filling gaps as it goes, but failing to take out the April high. Setting up for a 'real crash', later.

Uh-hu!

[Dow Predator]

>>The most likely path from here, is a rally filling gaps as it goes, but failing to take out the April high. Setting up for a 'real crash' later.

I Think the april high will NOT be taken out... Just the may high by a few points... Then a wild crash!!.. This rally should be used to raise capital for the next leg down.

Lets get this rally!!!

[Canadian Money]

Yelnick,

The second retracement of the EW Extended Wave (May 6th mini crash) is now complete for the Canadian TSX Composite Index. Classic Elliott Wave Principle.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=CA%3ASPTSX&sid=&o_symb=CA%3ASPTSX&freq=1&time=4

We should not be surprised to see the US Markets do the same thing. US indexes are not far behind.

[Roger D.]

Some Charts

http://www.screencast.com/users/parisgnome/folders/Default/media/3e22512a-b0d4-43ba-9959-bef246105fa9

http://www.screencast.com/users/parisgnome/folders/Default/media/f0eedf35-3b1b-4e29-a1b2-6d2fc6b423be

http://www.screencast.com/users/parisgnome/folders/Default/media/30d6ea6f-5057-437a-ab5b-4ec37cb3f842

Roger D.

[Zendo]

All these remind me of 1998, emerging market debt default and currency devaluation. Things just go from normal to really bad real quick. This time when you factor in all G8 government can't do a thing after 2009.... I think those who think we'll get a new high will be very disappointed.

[Roger D.]

KD says it best....

"THERE HAS BEEN NO PRINTING GOING ON!

No, what's been happening is worse.

Worldwide governments have borrowed and spent huge percentages of their GDP in a puerile attempt to protect a criminal class that has looted the public and bribed the legislature - THE BANKS.

There was always a point where this would fail, but it is flatly impossible for anyone to know exactly where it was beforehand.

But mathematically, there was a point where it would fail.

The gamble that Bernanke, Trichet, Obama, Bush, Paulson, Geithner and everyone else in the world took is that we could do this for a short period of time and that in doing so private demand would pick up and return us to "stability."

THESE PEOPLE DID NOT STUDY THE ABOVE CHART, AND THEY'RE F^#KING IDIOTS FOR BELIEVING THAT WHICH WAS TRIED IN 2003-2007, WITH A HIGHER DEBT LOAD THAN WE HAD THEN, WOULD WORK NOW WHEN IT FAILED IN 2003.

Failed?

Yes, FAILED."

http://market-ticker.denninger.net/archives/2336-The-Roof-Is-On-Fire.html

[upstart]

I'm about on the same page as Predator. I had said 10200 at least, a bounce into early June, then down again to new lows for the correction as 3 monthly cycles sync-up a few months from now. Again, Jim Rogers is right about being in a period of correction now.

[Thrill]

Nice post Yelnick, and thanks for the charts Roger D.! Where do you think the bleeding stops Roger, and in what time frame? I'm looking for Dow 8000 or 8500 this summer....

[Roger D.]

Thrill,

This market broke on high volume(2.2 billion shares)initially,if the volume exceeds that level in the next day or two,I expect a historic panic.

Roger D.

[Mamma Boom Boom]

Dow Predator, you could very well be correct. But there is a gap up there about 1200 that needs to be addressed. I hate to leave work undone.

[MHD]

For all you bulls out there, wearing gloves is probably pretty smart as you try to catch those falling knives!!!!!

[marketman]

Bought more (4,000 shares) of NRP this morning at 20.75 - 20.80

Yielding 10%
:)

[marketman]

Roger,

How large is your trading account and how much do you have of it positioned on the SHORT side of the US Equity market?

Please give me a dollar amount.
Thank you.

[Wave Rust]

hmmmm

dow 10,200 hmmmm

now what?

wave rust

[Mr. Panic]

The index that broke through its flash crash low yesterday is now below its Feb low. If this is a 99% negative breadth day (I haven't checked yet) then its closing on the low of the day. If the Feb low is taken out by most indices, watch out.

[Mamma Boom Boom]

>hmmmm

dow 10,200 hmmmm

now what?

wave rust<

Check with any housewife, they all know

[Roger D.]

The Valueline Monthly Chart. At this point I dont think the count matters. A collapse is in the charts,because of the Parabolica involved. A five wave Monster "C" down to 200 or so would fufill this pattern.

http://www.screencast.com/users/parisgnome/folders/Default/media/8256675e-adce-4685-bfa4-1a1368f41633

Roger D.

[Michael]

I've been buying the coal miners and iron ore companies today (ACI,WLT, ANR, CLF).

[Bird]

Michael, I could only really look at ACI on the 60 min. It did not yet look ripe to me.

[Roger D.]

marketman,

IMHO, the thing you have to worry about is the safety of that 10pct yield. I hope the NRP purchase is short term because it's headed to below "10". Good luck.

Roger D.

[Roger D.]

The Dow

http://www.screencast.com/users/parisgnome/folders/Default/media/f79400aa-9cc5-4c31-80d3-524b1577b7d6

[Michael]

Bird,

I don't think that you can realistically use an hourly chart on ACI or the rest of the COAL stock sector for that matter . . . For example, CLF just rallied from 47.80 to 49.70 in 45 minutes and WLT from 66.50 to 68.94

Those are HUGE moves that can be most profitable for the ACTIVE TRADER.

:)

[marketman]

"MHO, the thing you have to worry about is the safety of that 10pct yield. I hope the NRP purchase is short term because it's headed to below "10". Good luck." - Roger

Thanks Roger.
I'm glad that I have your seal of "contrary" approval.
I will be buying more. Last trade: 21.32

[Bird]

Michael, fair enough. I was looking at a slightly longer time frame.

[Thrill]

"Check with any housewife".... Mama, you mean just give it all away? :)

[Roger D.]

"Thanks Roger.
I'm glad that I have your seal of "contrary" approval.
I will be buying more. Last trade: 21.32"

It's your money.

But, really this is probably the most dangerous market in the last 80 years.

Be careful and remember if it's too good to be true,it probably is. High yields are a barometer of the risk level and given zirp, your on the wrong side here.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/58bc2928-6f3d-4f67-ab94-b90522fa009d

[Roger D.]

The REIT's have risen because of their high yield, but this chart suggests that the coming credit collapse will wipe them out in general bankruptcies...Beware!!!!!!!!

Roger D.

http://content.screencast.com/users/parisgnome/folders/Default/media/2b4dccec-2af1-45eb-8819-2f7bf7cc360c/2010-05-20_1319.png

[Mamma Boom Boom]

Thrill, he knows what I mean. He made a smart-ass remark to me the other day

[Zendo]

Just an observation, most EW blog during early 2009 expected we were in a corrective bounce, new low was imminent, subsequently we have all these ultimate top call by many EW guru as the market climbing higher and higher. By late 2009 and during early 2010, many EW blog start to think the market will make new high coincide with improving economic numbers. Now the market has made very sharp corrections, and the market seems to roll over slowly and many EWers still believe a bounce to new high is possible, maybe they will make the same mistake and keep calling a bounce as the market will keep going lower and lower?? Given their consistency over past 18 months, I will tend to think the market is not going to have a new high...

[Roger D.]

Zendo,

I think most wavers were bearish once the market reached the 50 pct level. When the market bounced off the febuary low some turned bullish and remain so becuse of the 5 waves off the March 2009 bottom.

Now the liquidity alone will stop any bull in it's tracks as there is only 3.4 pct mutual fund cash as of March. This has probably moved lower in April,so redemptions will definately trigger selling. Like 2008 a move lower will create a cycle of greater and greater selling.

Forget trying to interpret the squiggles day to day. All most need to know is this supercycle bear market has resumed it's destructive path downward and you don't want to be a holder of any long positions.

Roger D.

[Zendo]

I agree Roger. I don't trade or track every ticks. Just want to point out the obvious. In reality the EW system fail consistently. In this case, when market drops and make new lows, any bounce seems corrective and everyone is looking for tops until the bounce is over certain percentage (Fibonacci is a death trap). After that threshold EWers will keep thinking any pullback is correctives and looking for new highs... thats a bi-polar disorder.

[Fausto]

The evil evil speculator gets a great point of view of Market condition now. Another great wave master is Filipe Miguel from elliotmarketwaves. He´s great. I never seen his charts here.

[Guido]

Yo Gleen Loser;

Who's DG?

Why are you glad he's gone?

How Much did you lose while you subscribed to Neely?