Here In Part 1 We Cover Key Background Information:  The Distinction Between Risk & Safe Haven Currencies

Any prudent investor now needs a basic grasp of foreign exchange (forex) markets. Economic policies are eroding the value of most major currencies and anything denominated in them. The following is an excerpt from The Sensible Guide To Forex: Safer, Smarter Ways to Prosper from the Start. In this excerpt we cover some forex basics that all investors can use right away to improve their returns, even if they never trade forex.

While it sounds strange to think that there could be any winners from the ongoing deterioration and possible end of the EU and EUR as we know it, in forex there are always winning and losing currencies, because currencies always trade in pairs, with one always rising and one always falling versus the other. In forex, unlike other asset markets, there’s always a bull market somewhere.

Even better, you don’t have to be an active trader to exploit these markets.  As we showed in Forex markets produce some of the most stable long term trends that are perfect for passive long term investors. The basic reason why forex produces more and better long term trends than other markets like stocks is:

Currencies endure far longer than the average publicly traded company

While the fundamentals of a company can change within a matter of months, fundamentals of national economies change much more slowly. The relative competitiveness of an entire nation or economy, its growth and employment rates, etc, can take years or decades to change. Currencies tend to behave like the shares in an economy, so if one economy is doing better than another, that situation tends to persist for years or even decades. While long term market trends that favor risk or safety currencies can influence the trend of a currency pair, secular bull or bear markets also take years to play out, and so long term expansion and contraction cycles can also reinforce certain long term forex trends.

The most basic criteria to understand about each of the major currencies is

• whether they are risk or safe-haven currencies
• how that determines their performance and correlation to other types of assets
• how to profitably exploit that knowledge

The following article is a summary from the book’s more detailed coverage of this topic, and provides the needed background information to understand Part 2 of this series.

Definition of Risk vs. Safe Haven (Or Safety) Currencies

Here’s the basic distinction between risk and safe haven currencies.

• Risk currencies behave like other risk assets, such as stocks or industrial commodities (oil, gas, copper, etc); they rise when markets are feeling optimistic, and fall when markets are nervous.

• Safe haven or safety currencies behave in the opposite manner, like other safe haven assets (investment grade bonds and commercial paper, short term money market funds, etc), rising in times of fear and falling in times of optimism about economic growth.

NB: These classifications have NOTHING to do with how safe a given currency may be as a store of value. Rather these names refer ONLY to whether the currency generally behaves like other risk or safe haven assets.

For example, although the CAD is considered a “risk” currency, Canada’s low debt/GDP, strong economy and healthy banking system makes it one of the safest currencies as a long term store of value in which to have your savings.

The Risk Ranking

Here’s the traditional ranking of currencies in order of risk, that is, which ones benefit most when markets are feeling optimistic, going from left to right:

This means that when risk assets are rising (aka a “risk on” market), traders typically are:

• Long pairs that have a base currency that is higher on the risk scale than their quote currency, like the AUDJPY or EURUSD

• Short pairs that have a base currency that is lower on the risk scale than their quote currency, like the GBPAUD or EURNZD

When risk assets are falling (aka a “risk off” market), traders typically do the opposite. Remember, currency pairs move in the direction of the base currency, rising when it rises relative to the quote currency, and vice versa.

The ranking rarely works perfectly over a matter of days or weeks but is a useful generalization that works in the longer term.

Currency-specific news items regularly cause currencies to behave out of order from this ranking in the short term. For example:

1. Even if markets are feeling very pessimistic, if there is news that is bad for the JPY, it may not be strong that day despite the market being in “safe haven” mode.
2. Even in times of optimism, the AUD could underperform the other risk currencies due to specific events or conditions influencing:
1. Australia, like slowing growth or sinking expectations about interest rate increases.
2. Bad news about the economy of its biggest export customer, China

The Safe Haven Currencies

In descending order these are: the JPY, USD, and CHF. Thus when markets are nervous, the JPY is usually the strongest, followed by the USD and CHF, and all 3 of these to gain against the above risk currencies. During times of great pessimism, most traders would try to short the following pairs by buying puts on them: AUDJPY, AUDCHF, AUDUSD, NZDJPY, NZDCHF, NZDUSD, etc.

Again this ranking is a generalization.

Currency specific events can cause currencies to perform in ways contrary to their risk or safety ranking. For example, over the past years the CHF has in fact been the preferred safe haven due to Switzerland’s stronger economy and lower debt levels relative to those of the US and Japan. However when there is great fear about Europe’s economy, the CHF may weaken, because most of Swiss exports would suffer. Also, the Swiss National Bank, like other central banks, periodically intervenes to keep the CHF low in order to protect Swiss exports.

What Causes A Currency To Become A Risk Or Safety Currency?

While there are other factors that we cover in the book, here’s a quick look at the most important ones.

Benchmark Central Bank Short Term Interest Rates

There are a number of factors, the strongest of which is the currency’s benchmark short term yield. Those currencies with higher short term interest rates, or those expected to have higher rates in the future, tend to move with risk assets due to their use in carry trade (buying of higher yield currencies funded by selling of lower yielders and profiting on the difference in rates while you hold the long and short positions).

Expectations About Future Rates

Closely related to the above are market expectations about whether a given currency’s yield will be rising, falling, or flat in coming months. While interest rate differentials may determine longer term risk ranking, its expectations about those differentials that can determine how performs against another over a given period. For example, let’s say that 2 central banks A and B both announce a 0.25% rate increase on the same day. If the rate hike for A is believed to be the last one, and the hike for B is believed to be one of more increases still to come, then A is likely to sell off on profit taking. Meanwhile B is likely to enter a sustained uptrend, certainly against A, as traders see the increase as confirmation of the anticipated chain of coming rate increases.

Thus if interest rates for a given currency are expected to rise dramatically relative to those of other currencies (typically due to rising growth expectations for that nation) it’s possible for a formerly low yielding safe haven currency to evolve into a high yielding risk currency. The opposite can also happen.

There Are Other Determinants of Currency Risk Ranking

While current and expected future yields are crucial, they’re not the only determinants of risk ranking. For example, currencies of export based economies that prosper or decline with global growth logically behave like other risk assets and hence are considered risk currencies. For example in recent years the yield on the CAD was equal and often lower than that of the EUR, yet the CAD was overall higher on the risk spectrum than the EUR.

Now that you’ve got the above background information on risk and safe haven currencies, we can move on to Part 2 -their correlations and how to use them, that’s already up. After that,  you’re ready for Part 3- finding the profit opportunities in forex markets from the EU crisis. It should be up within the coming week.

While forex markets are typically associated with high risk, complex, time consuming short term trading, there are many safer, simpler ways that conservative investors or traders with limited time and skills can tap forex markets for currency diversification and currency diversified income.  To learn more about how to improve your returns through conservative forex trading and investing, take a look at The Sensible Guide To Forex: Safer, Smarter Ways to Prosper from the Start.

It’s the only book specifically written to show mainstream investors how to survive and hedge currency risk posed by unprecedented money printing by most major central banks, and how to prosper by safer, simpler ways to exploit forex and commodity markets, either as conservative traders or income investors, for lower currency risk and better returns. It’s essential reading for all investors, because a good investment in a bad currency is a bad investment.  Click here for a description of the book, and here for advanced reviews. It’s due out in September 2012, reserve your copy by clicking here.

Click here to proceed to Part 2

Disclosure: For informational purposes only. No positions.

FINDING THE FOREX BULL MARKET IN THE EU CRISIS: PART 1 is a post from: Global Markets

There are 4 likely market drivers for the coming week. Only one is truly dominant, and to profit from it, you need to ask and answer 3 key questions.

First, some background.

In case you ignored market news for the past 2 weeks, here’s all that you need to know in order to understand what’s coming.

For the 3rd straight week, ever since markets became focused on the risks that the May 6th Greek elections would result in Greece reneging on its bailout deal, there has been only one real market driver.

Global financial markets have been moving almost exclusively on news related to the likelihood of Greek default, and more importantly, the implied contagion risk. Specifically, that a Greek default would result in:

• An end to EU aid, causing a collapse of the Greek banking sector both from losses on their Greek bond holdings and cash drain as depositors withdraw cash while they can.

• Chaos in the financial and banking sectors of the rest of the GIIPS, most importantly too big to bail or fail Spain and Italy, as both credit markets and depositors treat them bigger versions of Greece awaiting similar fates. Both have already seen their banking sectors’ credit ratings downgraded, and benchmark 10 year sovereign note yields top the psychologically important 6% line (already unsustainable, but also one step closer to the 7% level believed to indicate bailout or default unavoidable).

• Ghastly uncertainties as the world enters a panic phase theoretically much worse than that experienced by the 2008 Lehman Brothers bank collapse, because:

• The EU is not as capable as the US was of moving quickly to do what’s needed to calm markets with guarantees of bank stability. The US is one government with only one President, central bank and treasury. Right or wrong, it can reach policy decisions and act on them far faster.

• Potential third party exposure to sovereign states, especially big ones like Spain and Italy, is obviously far greater than it was for one US investment bank. The full scope of these is unknown. Theoretically much of that exposure was hedged, though as we learned in 2008, default hedges often fail in market panics because they aren’t designed for them. Like your insurance company cannot pay more than a small fraction of its policy holders at any one time, those providing the hedges typically don’t anticipate the volume of claims from a rare market wide collapse. The reported loss by JP Morgan due to a failure to hedging failure provided an ill-timed reminder that even the supposedly best managed financial institutions remain vulnerable to human error.

• Given the likely widespread exposure of most major banks and financial markets to such large economies as those of the EU (all heavily exposed to Spain and Italy), the first reaction of markets will be to sell. Hard. Really hard.

1. EU CONTAGION RELATED NEWS: THEY SAY GREECE, THEY MEAN SPAIN & ITALY

Ironically, while events in Greece are likely to move markets on a daily basis, over the longer term what happens in Greece is irrelevant. Why? Because even if Greece elected a government that unanimously promised to uphold its agreements with the EU, would you believe them? Over the past years they haven’t, their economy is even worse shape than ever, so why should anyone believe them anyway?

If however, you believe Greece will elect a pro bailout government that will actually fulfill enough of its obligations to keep the funds coming, stop here, the rest doesn’t apply. For less optimistic, here’s what to focus on for the coming weeks.

2. ONLY THREE QUESTIONS MATTER REGARDING THE EU CONTAGION THREAT

The only real question for virtually all financial markets and asset classes in the coming weeks is:

Key Question #1

Will the ECB, and probably the rest of the major central banks (led by the Fed), will once again surrender the current game of chicken and step in with yet another massive dose of cash to stave off the above contagion threat? Or, do they decide to stop throwing good money at a lost cause?

To answer that question, let’s first lay out a few points.

If they elect to provide more aid, its terms are likely irrelevant: The conditions attached are probably also as irrelevant as the Greek election results, for the same reason. Greece can’t pay, so it won’t.  The money is for preventing a collapse in Spain and Italy, and saving the EU and global economy. Greece? Child, please. Greece can’t repay, and the EU isn’t ready to send in troops to enforce repayment.

Yes, the game cannot go on forever, because the moral hazard created would eventually mean on decades of cash giveaways to the rest of the GIIPS, for the same reasons, printing mountains of cash, debased currencies, etc.

Key Question #2

Therefore, to answer #1, we need to ask a second, more fundamental question:

Have EU and global leaders completed preparations to prevent the feared contagion, market and economic crises likely to follow from any GIIPS nation default?

–If so, then Greece will be left to face its eventual default in the coming weeks, because the only reason for providing the handouts of the past no longer applies.

–If not, then the same contagion risks apply, and we can expect the game to continue: more bailouts, money printing, tough conditions attached, (wink, wink), wash, rinse, repeat.

Because we don’t really know, the better question may be, what are the odds of that they EU, Fed, et.al are ready for a Greek default without contagion?

Our answer: thus far, not good.

We have seen little evidence of progress towards the capacity for quick and decisive action needed to keep a Greek default’s effects largely limited to Greece. Specifically, is there a single body that can guarantee the liquidity and ultimate solvency Spanish and Italian banks, and as well as Spanish and Italian sovereign debt on which these banks have bet their existence?

The huge caveat to this conclusion is that IF they’ve made such provisions they’re likely to come as a surprise, announced as part of the remedy to the shocker announcement that there will be no more aid and so Greece is effectively insolvent, out of Euros, and must return to the Drachma or reasonable facsimile.

The surprise element is needed to panic driven market collapses, prevent bank runs and other symptoms of market panic. Market and bank holidays may also be on the menu, along with capital controls, short selling bans and more.

This leads to the third question.

Question #3

Even if the Troika and related parties like major central banks have got a plan ready to implement, can they keep it a secret? Will we have any advanced warning?

Our answer: probably, if you know where to look. While the most sophisticated players may be able to hide their advanced knowledge in “dark pools” of capital outside of publicly monitored and regulated markets, the big money movements should appear soon enough in public risk asset markets.

3-4: OTHER LIKELY MARKET MOVERS

The other likely sources of market moving events include:

3. Technical Support Levels Combined With Official Spin Control

Given both the recent fear level and likely coming attempts to calm markets that typically occur during the annual spring Greek default panics, technical support levels on daily and weekly charts could provide some stability, particularly when leaders attempt to talk up markets. Oversold markets are more likely to bounce on even the most minor justifications as traders seek opportunities to book short term profits.

The weekend’s G8 meetings, speeches by key central bank figures, and other official meetings might provide occasions to stem the pullback in risk assets. Remember, despite the scary headlines, many risk barometers, particularly those not closely related to the last EU troubles (like US stock indexes) have not dropped dramatically relative to their recent highs, but rather from a technical perspective are just in a normal pullback phase.

4. Economic Calendar Events

The coming week’s calendar is a typically relatively quiet 3rd week of the month. Highlights include:

Tuesday

UK: CPI, public sector net borrowing, BoE inflation letter

US: Existing home sales

Wednesday

Japan: Rate statement and press conference

UK: MPC meeting minutes, retail sales, revised GDP

Canada: Retail sales

US: New home sales

Thursday

China: HSBC flash mfg PMI

EU: French, German, EU mfg and services PMIs

US: Durable goods, first time jobless claims

LESSONS & RAMIFICATIONS

For Short Term Traders (Time Horizon Coming 1-6 Weeks)

In general, keep an eye on the markets with big players with the best intelligence:

• Credit Markets: CDS spreads for GIIPS sovereign and bank debt
• Forex Markets: The EURUSD and other currency pairs with EUR components.
• Commodity Markets:  Particularly gold, not a risk or safety asset (see my recent posts here and here). Whether or not the next big EU rescue plan includes printing mountains of unsterilized cash, markets are likely to assume that it does. New stimulus programs have generally been very good for gold and other fiat currency hedges due to the implied risk of lost purchasing power. Note that gold made a dramatic bounce last week. It could easily have been just a normal technical oversold bounce. However, it could also betray at least a suspicion that, as in the past, Team Troika is ready to step in with cash to buy more time to find a solution that prevents another global meltdown.
• Other risk asset barometers: major stock indices should be close behind in jumping higher.

For Longer Term Traders And Investors (Multi-Month Holding Periods)

Past behavior of the Troika and other major central banks, as well as the US government in election years, suggests they’ll seize any chance to defer a crisis, even if that deferral raises the risks of a more cataclysmic default wave later.

The likely result is more money printing from the ECB and Fed, with the BoE and others doing their part too. While inflation could be limited in low growth economies that avoid stagflation, ultimately that should mean loss of purchasing power, particularly as economies stabilize and recover, and pent-up deferred spending starts chasing a limited number of goods and services.

In the most general terms, that means avoiding at all cost being stuck with your wealth in just one currency, particularly the USD and EUR, which are likely to see the most currency dilutive policies in the near term. As noted in recent posts, I’m no fan of the JPY or GBP as long term stores of value.

For Further Guidance

As I’ve recently explained AVOID MOST COMMON FATAL INVESTOR MISTAKE (Part 1), just because you earn and spend in one currency, you’re not insulated from the effects of its declining purchasing power.

Fortunately there are a variety of relatively simple ways to do this without opening brokerage accounts all over the world or getting involved with excessively risk or demanding kinds of forex trading.  Finding conservative, sensible advice suitable for most risk averse traders and investors in one convenient place or book hasn’t been easy. So I’ve spent the past years pulling together the best solutions in the coming book,  THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the START (includes links to where you can lock in the lowest pre-release price and reserve a copy for when it’s released) See this link for why and how this book is your best guide. For a sneak preview of advanced reviews, see here.

Here’s a personal thanks to those who’ve already placed orders and kept us regularly within amazon’s top general sales rankings and rankings for forex books. This is the first forex book aimed at risk averse traders and even long term investors with no interest in trading. Your support helps get this groundbreaking message out: that we don’t have to accept the diluted paper that many of the central banks are serving up.

The best defense we savers and investors have is to show them we can vote with our wallets and invest via currencies managed by more responsible governments. Yes, politicians much prefer to inflate away debt rather than raise taxes or cut entitlements. However we don’t have to fund their political careers by accepting stealth taxation of currency dilution.

Birth Announcement: thesensibleguidetoforex.com

No single book can be the comprehensive and perpetually updated answer to achieving prudent currency diversification and protection from the central bank attempts to lower national debts at the expense of savers and investors.

That’s why I’ve launched thesensibleguidetoforex.com.

The site is starting off small and simple, but the goal is to become the online center for free education and guidance on attaining currency diversification, either via conservative forex trading, or building long term portfolios for currency diversified income streams with less currency risk and greater returns.

In addition it will provide a growing archive of bonus and continuing education content for those who’ve read the book.

Related Posts

WITH EU READY TO PRINT OR DIE-AVOID MOST COMMON FATAL INVESTOR MISTAKE

THE MOST COMMON FATAL INVESTOR MISTAKE: PART 2- GBP POUNDS UK INVESTORS

A CLASSIC MISUNDERSTANDING OF GOLD FROM GARTMAN, THE CORRECTION, AND SOLUTION

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

COMING WEEK: 4 MARKET MOVERS, 3 QUESTIONS TO ANSWER TO EXPLOIT THEM is a post from: Global Markets

Coming Week Market Movers

The following is our weekly preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week’s market movers and trade ramifications.

1. GREECE: The Third Annual Greek Spring Breakdown -Another Big Game of Chicken

A Greek default and EZ exit remains the biggest near term threat. As we predicted in last week’s post, reaction to the election results had potential to dominate market sentiment IF the election raised the threat of Greece reneging on its bailout commitments and defaulting. It did, producing the worst case scenario result: either a coalition or another election that ultimately sets Greece on course to renege and/or default.

Greece remains the nearest knife at the EZ’s throat, and so we expect news related to the chances of a sudden exit and default to again dominate sentiment across risk asset markets.

The argument that a Greek default was mostly priced in died this week, as most major stock indexes and the EUR got bitch whipped mostly from Greek election results. It isn’t Greek default per se that scares people, the EU can afford that one (as for Greece itself, few care). It’s the fear contagion: that financial and credit markets freak, flee the EU, the other GIIPS are forced into default and/or the EUR gets printed into oblivion or disappears, etc.

Given that no one expects any quick resolution, Greece is likely to hit the markets in one of 3 ways:

• The best case scenario for the coming week is that there are no major negative surprises from Greece
• The worst case would be that there are, and they push up the odds of the feared sudden exit and related contagion as other GIIPS and even the core EU nations get slammed in financial and credit markets.
• The middle and likely case: leaders on both sides continue to buy time, make threats but leave options open, and Greece continues to exert downward pressure on markets.

Specifically, the consensus is that there will be new elections that put the left wing anti-austerity/bailout agreement Syriza party in charge, putting Greece on a collision course with the EU, which obviously cannot allow the precedent of reneging on bailout agreements. ECB Executive Board member Joerg Asmussen has rejected any change to Greece’s reform program if Greece is to remain in the EZ. Greek’s banking system is utterly dependent on the ECB, and as Italy’s former PM Berlusconi learned, it plays hardball when needed.

What’s clear thus far is that Greece doesn’t want to leave the EZ, but that the political will for continuing with the bailout program seems exhausted, yet the ECB insists they continue. Hmmm. Of course, this is all part of the normal negotiation in the annual spring break (down) in the Greek drama.

The fate of Greece is a political matter decision and thus particularly unpredictable in the short term given the number of players. We don’t know what politicians on the Greek or EU/creditor side will say or when they’ll say it; however here are specific events to watch this week.

• Final attempt at coalition and avoid another election: By early this week we’ll know if final attempts over the weekend to form a coalition were successful. If not, then another election is coming. It’s expected to bring in a more radically anti bailout regime

• Greek bond redemption: While Greece has enough cash to avoid further defaults until June, there’s a ~€450 million bond redemption due next week. With a hung Parliament and possible default looming anyway, it’s likely that Greece will use its 2 week grace period to delay payment until the end of May. This would both save cash and maintain uncertainty and pressure on the markets and EU to offer Greece a better deal. The delay is good for Greece, bad for global markets as it feeds fears of Greek default.

• EU Spin Control: Given the likely bearish effects of the above, expect some spin control from other EU officials. If markets are desperate enough for some positive news (and at technical support levels anyway) that might inspire some stabilization or even a bounce for risk assets).

Longer term, Greece’s fate is clearer. Unless the EU, particularly Germany, decides to spend a lot more in debt forgiveness and other growth inducing aid, Greece will default, exit the EZ because it can’t afford to do otherwise, and suffer even greater contraction in the coming years, at least before the benefits of reduced debt payments and a devalued currency begin to spur growth similar to that experienced in other post default situations (like that of Iceland).

 Will MAD Threat Continue to Work?

The big question is, how long is the longer term? Leaders in both Greece and the EU clearly want to keep Greece in the EU. Like the US and Russia during the Cold War, the threat of Mutually Assured Destruction kept both sides minimally cooperating.

Expect all parties concerned to try to buy more time while they figure out how to reconcile Greece’s inability to live up to its agreement with the EU’s inability to set a precedent of a GIIPS nation reneging on its commitments to repay and still getting aid.

2-3. OTHER EU: SPAIN, FRANCE, & GERMANY, OH MY!

While Greece remains the nearest term threat, Spain and Italy are the bigger ones given that their debt loads are too big for them to be bailout out under current conditions.

Spain

For now Spain is the more pressing concern as its bond yields (cost of borrowing) rise, and are likely to rise further as it proceeds with bank reforms. These are necessary, but are likely to result in more bank debt becoming sovereign debt. The danger is that Spain faces an Irish scenario, given that bad bank loans represent such a large part of Spanish GDP

Specific events to watch include:

• Monday: Italy is selling 10 year notes, which are the benchmark for determining current market sentiment about Italy’s creditworthiness. Expect the ECB to insure demand is acceptable. That means a good auction (expected) may not boost confidence much, but a bad one should be very bearish.

• Tuesday: EU Finance Ministers meetings: Might produce some comments of note.

• Thursday: Spain sells 10 year bonds. As with Italy, the sale is the latest check on its creditworthiness and could move markets if it exceeds or misses expectations.

Franco-German Reconciliation?

Theoretically the May 15 meeting between newly elected French President Francois Hollande and Germany’s PM Merkel should be a huge potential trouble spot. Hollande campaigned and won on a promise to renegotiate the EU fiscal pact and weaken its austerity measures. Merkel is opposed. Hollande has already begun moving closer towards Merkel’s position and the consensus is that their meeting will produce a growth pact as a compromise to offset some of the pain of the fiscal pact, and the Franco-German EU leadership team will continue forward, ultimately with some grudging additional German compromises. See here for further details

The thing that might complicate the above scenario is if Merkel’s party suffers badly in regional elections this week and she feels pressure to stand firm to protect the EUR’s value.

On Wednesday Germany is due for a 10 year bond auction, which could hurt sentiment if it’s unexpectedly weak.

4 – 5. US: TWO BIG NAME STOCKS AND THE FED

Last week JP Morgan Chase, the largest US bank in terms of assets, reported billions lost on bad trades and undermined confidence in the critical US financial sector. News concerning the loss, which apparently came from negligent risk management, and market reaction could continue to move markets this week. Also, Facebook’s IPO is expected to be the largest for any internet stock ever, and so might prove market moving if it exceeds or misses expectations

The FOMC’s April Meeting minutes will provide the latest look at Fed thinking and influence expectations about the likelihood for additional US stimulus (a key market moving consideration over the past year).

6-9. Other Key Calendar Events

Here are the other important calendar events to watch this week that we didn’t mention above.

Tuesday: German ZEW survey and US CPI, retail data, as well as Empire State Mfg index and TIC Long Term Purchases

Wednesday: UK – BoE Gov King Speaks and inflation report, EU – ECB Pres. Draghi speaks, US – Building Permits, Housing Starts, Industrial Production

Thursday: US – weekly first time jobless claims, Philly Fed Mfg index

Friday/Saturday: G-8 Meetings

Consult any good economic calendar like that of forexfactory.com for additional events and details

10. TECHNICAL PICTURE

Our preferred risk asset barometers, the S&P 500 weekly chart look primed to test lower support levels.

For example, the weekly S&P 500 chart shows a bearish head & shoulders pattern that suggests a test from its 1350 level at the end of last week to ~1300, where its 50 week EMA also resides, so 1300 is the next test. A break below that suggests the next real support is around 1230-1200.

So breaches of the 1300 level suggest similar further declines for other risk assets.

S&P 500 WEEKLY CHART

Source: MetaQuotes Software Corp, globalmarkets.anyoption.com

01 may 13 0300

4 LESSONS AND RAMIFICATIONS

So practically speaking, what do you do?

1. Stocks: EU Crisis Periods Bad For Risk Assets In General

Given the still elevated level of most indexes relative to recent years, they remain vulnerable to bad news. By region, most European stocks remain riskiest, followed by Asia and then the US as the least of a bad bunch. We’re not keen on new long positions in any of them, unless you’re a very long term investor and getting a very stable dividend, so that you treat these as long term bonds, bought with cash you won’t need.

After an over 2 year break, we hope to renew our series of articles on the best currency diversified income investments from our coming site, thesensibleguidetoforex.com (companion site to our coming book on safer, simpler ways to avoid being over exposed to the USD or any other one currency, The Sensible Guide to Forex: Safer, Smarter Ways to Prosper from the Start (Wiley & Sons, 2012). Stay tuned for details.

2. Forex: A Bad Time To Be Overweight Most Risk Currencies

• USD, JPY The Least Ugly: Yes, the USD will continue to benefit while the EU continues to deteriorate and drag down the EUR, assets denominated in it, as well as currencies (and assets denominated in them) most closely connected to the EUR. Anything related to the CHF will be dragged down as long as the SNB continues to buy Euros and sell Swiss Francs in order to keep Swiss exports cheap. History has not been kind to central banks attempting long term currency manipulation.

• The AUD (and to a lesser extent NZD) move with the fate of China, which has not yet bottomed, though is still growing, so their fundamental picture isn’t as dire as that of the EUR and CHF (which would be great if the SNB would let the market determine its value).

• That leaves the CAD, USD and JPY, though the BoJ might intervene periodically. The USD remains the least ugly for now. While the CAD is a risk currency it’s more tied to the US than the other risk currencies, and the US is currently disappointing expectations less often than China, though China of course is still growing faster. The CAD is also the major currency  most likely to see rate increases in the coming year, and least likely to be subject to dilutive new stimulus measures, given recent data.

3. Gold: Short Term Uncertain, Longer Term Bullish

Given the above fundamentals and those we’ve discussed in prior posts (slowdowns or stagnation in most major economies and chances of severe shocks from the EU), dilutive stimulus programs from the ECB, BoJ, Fed, and SNB should favor gold’s recovery. Meanwhile, with EU fear peaking again, liquidity is a priority and so gold is breaking down. We await its stabilization and new signs of stimulus programs before resuming new long positions.

4. A Key Lesson From The Past Week

Regardless of what happens to Greece, the ECB is likely to be forced into further stimulus. Indeed, the combination of poor economic performance and recent election results in the EU has even senior German economic officials like Finance Minister Wolfgang Schauble considering accepting greater inflation, prompting shocked headlines in the German press questioning the safety of the Euro as a store of value.

The Fed remains open to more stimulus and is keeping rates low. Most central banks are turning more dovish, like the BoJ, ECB, BoE, and RBA just to name a few.

Such policies may be the best for their economies and debt burdens, but risk gutting the value of assets held in most of the most widely held currencies.  There are safe, relatively simple ways to protect yourself without opening bank accounts throughout the world or hiding gold bars under your bed.

However you do need to prepare yourself, because just like you need to be diversified by asset class and sector, so too you need to diversify your currency exposure, and not be hostage to the policies of any one central bank or government. Even if you spend in one currency, you’re still exposed to its loss of purchasing power. We’ll have an article up detailing how this much beloved (by politicians) tax works within the coming week – stay tuned for:  The Most Common Fatal Investor Mistake: Inadequate Currency & Hard Asset Exposure.

I’ve been thinking about solutions for the past number of years, and have set them out in The Sensible Guide to Forex: Safer, Smarter Ways to Prosper from the Start (Wiley & Sons, 2012).

A wave of advanced review have been very favorable, as it’s the first book to show mainstream investors how to get forex diversification while avoiding much of the risks and complications involved in traditional forex trading that have made this market too risk and unsuitable for most investors. We hope to have these reviews, as well as book excerpts and ongoing conservative investment and trade ideas up as the companion website comes online soon and begins its build out.

Stay tuned.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

10 MUST WATCH EVENTS THIS WEEK, 4 IDEAS TO CONSIDER is a post from: Global Markets

See Part 1 for prior week market movers

The coming week belies the saying “sell in May and go away.” Below are 9 very good reasons to stay alert this week. Actually I’ve counted 11, though the last two are of significance only for those with position in the UK or Australian markets, or in the GBP or AUD.

1-3. REACTION TO ELECTIONS IN GREECE AND FRANCE

France: The projected winner, the socialist candidate Hollande, introduces near term uncertainty because some of his stated policies are at odds with those of Germany and so threaten the unity of the EU’s Franco/German leadership, and so risk further hampering its ability to act.  That makes some kind of EUR pullback likely. Whether that pullback lasts depends greatly on whether he succeeds in calming markets by appearing conciliatory and flexible towards Germany. An upset Sarkozy victory avoids that uncertainty and so would likely be positive in at least the short term for the EUR.

Greece: The result here is less likely and the risks to the EU are greater. If opposition parties that did not provide written commitments to fulfill enact austerity steps demanded by the IMF, that could mean the swift end of further aid, a messy Greek default that could easily spark a panic induced wave of similar sovereign and banking defaults unless the ECB and Germany agree to engage in a new round of aid or money printing to fund yet another bailout. If the past years are any guide, after a bit of drama Germany gives in and opts for avoiding a crisis now, at the risk of a bigger crisis later when Greece defaults on yet even more debt.

Italian & German Regional Elections: Not nearly as important as the above but they could still hurt risk appetite if they suggest growing opposition to the EU.

4. DELAYED REACTION TO US JOBS DATA, ESPECIALLY IN ASIA

Because US jobs reports come out after Asia closes, it’s reaction doesn’t come until the start of the following week. Unless some great news comes out before then to balance the bad US job figures, Asia should open lower. The above elections could provide that balance, or greatly exacerbate the negative response from Asia.

That makes market response to these elections important, because a strong pullback in Asia to start the week could introduce and additional bearish factor….

5. BREAKS BELOW TECHNICAL RESISTANCE LEVELS FOR MAJOR RISK ASSET MARKETS

As noted in our weekly review of the prior week, many closely watched markets are now testing strong support after last week’s pullback. A significant break below that support risks setting off a wave of sell orders and pullback that could feed on its own growing momentum as that breaches multiple support levels. Remember that many risk markets like the S&P 500 remain near multiple yea highs despite months of steadily growing signs of slowdown.

6. COMING BANK DOWNGRADES FROM MOODYS

As we noted last week, Moody’s said they’d be releasing credit rating updates starting in early may. Given the relatively light economic calendar this week, any big surprises here could have disproportionately large influence on markets for good or bad. Many may be in the presumed healthy Northern Europe, so downgrades could be especially worrisome.

7. ITALIAN BOND SALES

Italian bond auctions on May 11 and 14 will provide the latest look at Italy’s creditworthiness. Given the light economic calendar this week, a surprise here too could have an unusually strong influence on market sentiment.

8-11.  OTHER TOP CALENDAR EVENTS

After the above, the coming week’s calendar is relatively short on likely market moving events.

• US: The only significant US calendar reports are trade balance and jobless claims on Thursday followed by producer prices and the University of Michigan Consumer Confidence index on Friday.

• China: Risk appetite will therefore pivot on Chinese data, of which we have plenty.  Trade, inflation, industrial production and retail sales reports are all scheduled for release.   Based on the latest PMI reports, As long China continues to be in “soft landing” mode, it poses no major threat to global growth. However, if next week’s reports show China slowing hard, we could be in for some additional volatility as a simultaneous slowdown in China and the U.S. would be bearish for the global economy.

• UK: Also, the BoE has a rate statement coming out, and monthly manufacturing production report, both of which could be significant for those with short term GBP positions

• Australia: There’s a batch of important Australian retail, jobs, and other data that should be watched by anyone with short term AUD positions (in addition to the above China data, to which the AUD is particularly sensitive).

Consult any good economic calendar like that of forexfactory.com for details

CONCLUSIONS

Here are the key take away points.

Best Case Scenario – Relative Quiet, Worst Case, Hard Selloff

This is the kind of week that could be very wild or quite, depending on how the above 11 market drivers interact. If the early week combined reaction to the elections in Europe and US jobs figures avoids a pullback strong enough to decisively break through current support levels that could ignite a wave of sell orders that start feeding on each other, then barring any major bearish surprises, markets have a good chance of avoiding a pullback. Given the overall bearish tone and potential for pullback, given the already elevated prices of most risk assets, that’s the likely best case scenario.

Diversify Your Currency Exposure

Regardless of what happens, most major central banks continue pursing low rate, easy money policies that are likely to ease their debt repayments, but at a cost of cutting the value of their currencies and anything denominated in them- including your assets.

Therefore, just as you diversify by asset class and sector, you need to diversify your currency exposure. There are a range of low risk, simple ways to do this without engaging in the kinds of high risk demanding forex trading at which most fail. The best and only guide to currency diversification for the risk averse mainstream trader or passive investor is  THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start (Wiley & Sons, September 2012). It’s the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex and commodity markets to hedge currency risk and improve returns.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

COMING WEEK MARKET MOVERS: Nine Reasons To Stay Alert This Week is a post from: Global Markets

Part 1 of Weekly Review/Preview: Prior Week Market Movers & Their Lessons For the Coming Week

The following is a weekly summary and strategy guide for traders and investors, covering prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options.

See Part 2 for our weekly review of what to watch for the coming week.

In last week’s weekly preview, we warned that our perception about the state of the global economy could change this week. It did, and markets have shown signs of recognizing that the tight trading range on the bellwether S&P 500 was a prelude to pullback and not a further rally.

For most of 2012, despite building evidence of a global economic slowdown and continued deterioration in the EU (despite the ECB’s LTRO band aid), risk assets, including the EUR, have been surprisingly resilient.

Risk assets just suffered their worst overall pullback in 2012.  Why, and what are the lessons for the coming week and beyond?

First let’s take a brief look at the highlights

Monday: Bad EU, US Data, Spain Worries Drive Markets Lower

With both Japan and China closed for holidays, the focus was on Europe and the US. Risk assets sold off in both markets, with Europe especially hard hit with major stock indexes down between 1.6% to 2.4%. Driving markets lower were the following reports:

• Germany:  retail data misses forecasts
• Spain: GDP contracts for the second straight quarter, putting it officially into recession, its banks’ credit rating was downgraded by S&P after its sovereign rating downgrade last week. Spain now joined 10 other European nations in entering a double dip recession, further complicating its ability to narrow its budget deficit by 3.2% this year as its tax base shrinks and joblessness rises to ~25%, ~ 50% for youth.
• Adding to the gloom, a number of  analysts noted that the Spanish banking system has crossed the 10% threshold of funding from the central bank  – a level at which private markets become  unwilling to provide further funding.
• US: Personal spending down, core PCE price index up (hotter inflation makes QE 3 less likely), Chicago PMI mfg data misses forecasts.

Tuesday: With Asia Mixed & Europe Mostly Closed, US USM Manufacturing Beat Brings Modest Rally

• Asian markets were mixed on conflicting data. A surprisingly large 0.5% RBA rate cut lifted Australian stocks and pounded the AUD. Meanwhile China and UK  both posted lower manufacturing PMIs, confirming earlier signs of slowdowns in both countries.. Europe was mostly closed for May day.

• That left the US as the only fully liquid market. Given the importance of the Friday monthly jobs reports, it focused on the upbeat ISM manufacturing PMI data, which bode well for Friday, and rallied modestly,  ignoring  the negative Chinese and UK data.

Wednesday: Risk Asset Resilience Despite Wave Of Bad Data Worldwide

• Except for Asia, which rose on delayed reaction to the US ISM data, risk markets fell on a deluge of bad data. Highlights included:

• In Europe, we saw a rise in German unemployment (only the second in the past 15 months), a drop in its revised PMI figures, and a slowdown in Italian manufacturing activity. The news caused a roughly 100 pip drop in the EURUSD from its 1.3200 level that shattered the pair’s month long uptrend, leaving it vulnerable to a test of 1.3100 or lower. UK construction PMI also fell, though less than expected. The big takeaway between the German jobs and PMI data was that it supported the fear that weakness has hit the EU’s core.

• In the US, a weak ADP NFP jobs report, ominous for Friday’s official BLS jobs report, as well as a drop in factory orders added to the bad news from Europe.

• Yet except for the EUR’s 0.75% drop, and stock indexes in Spain and Italy falling ~ 2.5% for the second straight day, risk assets showed only minor pullbacks.

• Indeed, the prior day had shown manufacturing PMIs falling throughout Europe, as well as in Asia, Brazil and most other emerging markets that had reported. Only Turkey, India, and Russia reported modest increases.

• One under the radar factoid worth noting: Goldman Sachs noted the significance of April’s plunge (-16.7%) in South Korea’s exports to Europe (U.S. +5.6%). It called Korea the “canary in the coalmine” because it releases export data earliest and has a high correlation to the rest of Asia.

Thursday: Market Resilience Broken By Uncertainty Ahead of US Jobs Reports, ECB Restraint, Bad Data

Then came Thursday, and the market resistance to the waves of negative data broke down. Over the next 48 hours the bellwether S&P 500 decisively surrendered both its 8 session uptrend and the significant 1400 level, falling to month-long support around 1360 to close its worst week in 2012.

• Asia: Mostly sold off ahead of holidays and uncertainty ahead of the ECB meeting and US jobs reports,

• Europe: Risk assets were mostly lower after the much anticipated ECB meeting offered no signs of coming easing measures. While Spain was able to sell €2.52 bln in three and five year bonds (beyond it’s expected amount), yields were 100-150 basis points higher.

• US: Risk assets sold off after bad jobs news hit that cast further doubt on Friday’s official monthly employment reports. The April ISM non-manufacturing index missed expectations. The jobs component of the report is considered among the best indicators of how the Friday reports will pan out, because most US jobs are in services rather than manufacturing.

Friday: Another Bad Monthly US Jobs Report

• Asia: Mostly closed modestly lower on uncertainty ahead of  the US jobs report and weekend elections in France and Greece, both of which could produce market moving reactions Monday.

• Europe & US: The combination of the poor US jobs figures and uncertainty about the French and Greek elections sent virtually all major European risk asset markets lower about 2% lower, and US markets about 1.5%. Crude oil fell nearly 4%. The jobs figures were bad enough to dent market confidence, but not bad enough to raise hopes of coming stimulus, which many believe is the only compelling reason to believe that markets could rally further. This same “bad but not disastrous” view that sunk stocks helped the USD because it raised demand for safe haven assets without materially raising hopes for new stimulus (which would weigh on the USD).

LESSONS AND RAMIFICATIONS: Markets At The Brink

The biggest lesson of the week: we haven’t gotten our signal yet to start shorting, but we’re really close. Here’s how we see things.

Ok, bad data and EU uncertainty hadn’t stopped markets from rising or holding steady thus far in 2012, so what changed?

The Fundamental Picture: Fundamentals Weighing On Markets This Week

The week brought a particularly toxic combination of:

• Bad Data In Both Quantity and Quality: We had an exceptionally large wave of significant manufacturing and jobs data this week. The US and China are slowing, most of Europe is too, or tipping into another recession. The US jobs reports, arguably the single biggest calendar event of the month, showed labor participation falling and wages stagnant. That means consumer spending, the biggest component of US GDP, is likely to worsen.

• Continued Rising GIIPS Bond Yields: Meanwhile, GIIPS bond yields keep rising higher, complicating their ability to  buy time by loading up on more debt, and weakening their banks, which have been loading up on these now depreciating bonds via the ECB’s LTRO program.

• Already Dour Context: All this comes after the prior week, which brought news of Spain and the UK back in recession. Spain is obviously a huge concern for the EU as the likely last stand for the EU and EUR as we know it. The UK too is significant, because its struggling even though it has the freedom to print if needed, showing that the slowdown is more than an EU affair.

• Exceptional Political Risk: Elections in both France and Greece could be exceptionally damaging to the EU’s outlook:

• —France: The likely result, a victory for the socialist Hollande, is expected to weaken the Franco/German EU leadership at a time when the ability to act in a united and decisive manner is more needed than ever as Spain and Greece teeter at the edge of the economic abyss.

• —Greece: There is a very real possibility that the election result in enough opposition party strength to prevent Greece from meeting the conditions needed to get further bailout money per the IMF’s Memorandum of Understanding (which some of these parties have not signed). If that happens, risk of a Greek default and contagion across the EU periphery rises. Greece has until June 30th to make the additional spending cuts.

• —So this election risks setting into motion a range of unsettling events, including a Greek EU exit and periphery-wide contagion as credit markets jack up borrowing costs to the GIIPS to compensate for the added default risk. These of course risk becoming self-fulfilling, if bond yields demanded from Spain, Italy, and Portugal become too high and the EU’s bailout funds become quickly overwhelmed without new money printing, to which Germany could well object.

The Technical Picture: Bent But Not Broken

As we’ve been saying for a while now, risk assets like the S&P 500 index being at multi year highs made them vulnerable to disappointments. The accumulated weight of bad data may have finally caught up to them.

Here’s the S&P 500 weekly chart for perspective, followed by a few key observations.

S&P 500 WEEKLY CHART DECEMBER 2009- APRIL 2012

Source: MetaQuotes Software Corp, globalmarkets.anyoption.com  01 may 06 0020

Bearish Signs

We have a nascent downtrend forming over the past 5 weeks

For the 4th time in 5 weeks, the index is now decisively below its Double Bollinger band buy zone, meaning the upward momentum of the rally that began in September 2011 is likely finished

The 10 week (blue) and 20 week (yellow) EMAs are flattening out, another sign of lost momentum

Bullish Signs

Key support for 2012 around 1360 has held.

Conclusion

We’ve said for weeks that despite the bearish picture we wouldn’t be shorting risk assets until we see signs of a trend reversal. We still don’t have that until we get a decisive move below 1330, which would take us below the support of the 20 week EMA. Only then can we say that the uptrend is not merely bent but truly broken.

If we get that signal, here are some assets to consider shorting:

Guiding Principles

Look at assets related to the EU, the epicenter of the trouble, then China, or more likely Australia, as its markets are generally an easier play on China. The US remains the least dirty shirt in the hamper for now.

Major Stock Indexes

Check your charts for which particular index offers the best entry points, as most move in the same direction.

Commodities

• Oil: In general, crude oil tends to exaggerate the moves of the major stock indexes, so depending on your time frame, WTI or Brent crude charts (or their ETFs) might offer lower risk entry points.

• Gold: Reflecting the fact that is NOT a risk asset, it has held within its tight trading range this week. However it’s unlikely to make a move higher until we get a new bought of fear about the EUR’s continued existence as we know it. If so, we’d be looking to be LONG gold, though we haven’t yet set what kind of break higher we’d need to see to suggest a new uptrend. Stay tuned.

Forex

If things break down the only question is, which of the 3 major safe-havens, the CHF, USD, or JPY do you like most vs. the highest risk AUD, NZD, or EUR? We would not be shorting the CAD right now (a separate discussion). If fear gets extreme, the USD is the obvious choice. If not, the answer depends on whether the BoJ and SNB continue to strive to keep the JPY and CHF low. The most likely scenario is that in the next bout of EU crisis, the SNB could be forced to abandon its EUR purchases and CHF sales that fund them, and the CHF could spike hard and fast.

Alternatives To Play All The Above: ETFs & Binary Options

Those without forex or commodity accounts can play these via the ETFs, but, check how the ETF is structured to be sure you know what you’re getting.

Alternatively, the simplest way to play a forex trend is via forex binary options. We prefer only those with weekly or monthly expirations, because they give the fundamentals time to play out, so stick to brokers that offer these, like anyoption.com (full disclosure, I provide content for them). Daily forex trends are harder to forecast, so be careful about binary options with shorter expiration times.

Binary option accounts can often be set up and funded very quickly, so don’t let you’re not having an account stop you.

Don’t Neglect Currency Diversification

No prudent investor would have everything in one kind of asset class or sector. With most major central banks actively weighing when to begin further rounds of stimulus or rate cuts that risk cutting the purchasing power of their currencies, it’s equally foolish to have everything you own denominated in one currency. Bernanke & Co. think we must just accept their stealth tax. No so.

Getting that diversification needn’t be complex, nor risky, if you’re prepared. Here’s your best source for simpler, safer ways to do it: is THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It’s the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex or commodity markets to hedge currency risk and improve returns. See my profile page or the above link for details. Call this naked promotion, but I feel like the guy selling lifeboat reservations on the Titanic. A minor annoyance, until suddenly…. Better to be safe than sorry.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

Prior Week Market Movers: Their Key Lessons For This Week is a post from: Global Markets

The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week’s market movers and trade ramifications.

See Part 1 For Prior Week Market Movers, Lessons & Ramifications

1. MAY 3 ECB MEETING

As noted in Part 1 regarding the lessons of last week, the fall of the Dutch government and first round socialist victory in French Presidential elections both point to the EU’s need to balance the pain of austerity with measures aimed at promoting growth among the struggling GIIPS block. Key points:

• Needs To Show A Plan of Action: Per Citi’s Steven Englander, markets want some to see progress towards easing risks of new contagion threats from the “too big to bail, too big to fail” twins, Spain and Italy. Keeping their rising yields in check is all about managing market confidence. No one expects solutions from Spain and Italy. It’s up to the ECB and other EU leaders to show that there’s some adult supervision on the scene. ECB inaction could undermine the relative calm and send borrowing costs soaring – which by itself is a renewal of the crisis.

• Shift to US-Style Pro-growth Policies? A major theme of the past week was that political events in France, Holland, Spain, and Greece all suggest an unraveling of the consensus among EU leaders that sole reliance on German-style austerity is the road to recovery. Instead, there ‘s a growing acceptance that the EU nations have reached the point at which austerity alone is self defeating because it sends GDP falling just as fast as debt, thus preventing nations from making their debt/GDP targets, and there are increased calls for more of balance between spending cuts and pro-growth policies. For more on the coming rebellion against relentless austerity, see here.

• Last Friday’s US GDP figure supports that position. It was below forecasts, however….

• After the UK (never mind Spain too)  officially double-dipped back into recession after posting its second straight negative quarterly GDP result, even the US’s 2.2% GDP figure from Friday looks good. Even though it missed consensus expectations of 2.5%, the US is still growing, which is more than much of the EZ and the UK can say.

• Watch for hints of:

• A new emphasis on growth policies to balance the pain of austerity
• A new dovishness from the ECB, which would boost most risk assets. The EUR would likely suffer from continued falling rates, like any currency. However the pro-growth upside of lower rates could well limit its downside.

2. MAY 4 US JOBS REPORTS

As almost always, the monthly US jobs report is among the very most influential scheduled monthly reports,  because of the size of the US economy, it’s dependence on consumer spending (dictated mostly by the health of the job market and wage growth), and the Fed’s use of jobs and spending data as the primary metrics for deciding policy. With the 4 week moving average of weekly jobless claims rising and Bernanke downbeat about the job market, expectations are not likely to be high. Thus anything but a huge miss will likely not shake markets or the USD much, and any significant beating of the consensus could produce a pop for both risk assets and the otherwise safe haven USD

3, 4 & 5. MAY 6th ELECTIONS IN GREECE, FRANCE, ITALY

These arguably have the most potential of all to set market tone for at least the near future.

Greece

In theory, the risk here is that the mainstream New Democrats and PASOK parties fail to secure a combined majority, creating uncertainty about whether the new coalition that includes more fringe parties will be able to continue the charade that Greece is cooperating with the EU and is actually trying to reform and repay its debts. Few believe it will, but no one wants that day of reckoning now while the EU is still trying to get its banks ready for a full Greek default, spike in other GIIPS bond rates, contagion risk, etc. After the recent LTRO operations, GIIPS banks and the ECB are sitting on even more dubious GIIPS bonds, and are more vulnerable to a yield spike/price plunge for those bonds.

Adding to the tension, even the relatively mainstream PASOK party’s candidate, Evangelos Venizelos, has essentially said that is party will not participate in the next coalition unless there is no major further austerity -  no new taxes or wage/pension cuts.

France

As half of the Franco-German duo that leads the EU, it’s the second largest economy in Europe and so if its fiscal health comes into question then so does the survival of the Euro , EU, and EZ as we know it. Beyond its size, philosophically and geographically France is the Economist called “the swing country in the euro crisis, poised between a prudent north and spendthrift south, and between creditors and debtors.” It plays good cop to Germany’s bad cop, and is thus critical in selling harsh Teutonic fiscal discipline to its Southern brothers.

The risk here is that:

• The first round winner Socialist Francois Hollande wins the second round
• He also actually believes and implements the ideas and policies he’s espoused in the campaign

Neither is a given, but if so that would policies focus more on raising taxes and  government spending, rather than cutting spending and promoting wealth creation, hardly a formula likely to inspire market confidence. His opposition to more market friendly policies and a leaner government pushed by Germany in favor of preserving the statist French model could sabotage the tight cooperation needed with Germany to lead Europe to reforms needed to preserve the EU and Euro.

Although there is considerable body of opinion that holds there is little material difference between what Sarkozy and Hollande would actually do, in the near term a Hollande victory provides enough uncertainty to rattle market confidence in the EU.

Italy

Just regional elections here, but these could confirm or undermine support for current reforms. Significant signs of opposition could bring unwanted concern from credit markets which in recent weeks have focused on Spain.

Again, it looks like Germany and the above nations are on a collision course unless the ECB and EU leaders can conjure up a convincing package of programs to promote growth that could ease the pain of further austerity needed to keep German cooperation and funding.

6 – 10. OTHER CALENDAR EVENTS

In addition to the above, this is a typical first week of the month economic calendar packed with market moving events from the world’s most important economies. Note that there will be

• a batch of earnings reports each day this week though as noted in Part 1 we expect their influence to wane as the tone for this earnings season is already set.

• a significant number of PMI reports throughout the world that will provide the lasts reading of economic health in the relevant economies

• the US reports that serve as preliminary guidance to the Friday monthly jobs reports. Depending on the strength of other news and the degree of surprise these provide, these too can move markets.

• At least one or two of the others below (like some of the major PMIs) could also move markets on a given day (that gets us to at least 10 big potential market movers)

Here’s a daily breakdown. See any good economic calendar like that of forexfactory.com for details.

Monday

Canada GDP: BoC already expected to raise rates, disappointment could dampen those, market pleasing results would feed them

US: Personal income & spending, Chicago PMI report.

Tuesday

A big day for PMI reports. In addition to those below, also have Japan and South Korea as a bonus.

China: Mfg PMI

Australia:  RBA Rate Statement- markets are expecting a rate cut, the only question is how big and what hints will come about further cuts.

US: ISM mfg PMI

Wednesday

UK: Construction PMI

US:  ADP NFP employment change – tends to get direction if not magnitude of the BLS report right, so it can move markets if it surprises materially alters expectations

Thursday

UK: Services PMI

EU: ECB rate statement and press conference

US: Weekly first time jobless claims, ISM Non-Mfg PMI

Friday

Australia: RBA rate statement & comments

US:  Monthly BLS NFP and unemployment rate reports, average hourly earnings

Canada: Ivey PMI

Lessons & Ramifications

So what does a brief summary of the  fundamental and technical picture tell us?

The Fundamental Picture: Multi-Year Highs Leave Markets Vulnerable

With risk assets, as represented by the major global indexes like the S&P 500, at multi-year highs, (and the S&P 500 only about 11% off its pre-crisis 2007 highs), and data of recent weeks (outside of earnings) mostly negative, markets are vulnerable to any excuse to take profits, even if just to retreat ~2% to the lower end of their multi-month trading ranges.

The coming week provides abundant chances for such selloff catalysts.

Moreover, as mentioned in Part 1:

The primary short term market support, earnings, is likely to start losing influence as the season enters its 4th week.

The primary longer term rally driver, hope from more stimulus, is likely to be frustrated in the coming weeks.

So unless the coming week provides a very upbeat picture, where will the fuel come for further gains?

The Technical Picture: Long Term Momentum Intact

Of course, the problem with fundamental analysis is that it doesn’t provide great guidance for timing your position entries and exits. For that we need to look at the charts. For the sake of brevity, we’ll take a quick look at the weekly S&P 500 chart.

S&P 500 WEEKLY CHART     MARCH 2011 – APRIL 2012      02 apr 290142

Source: MetaQuotes Software Corp, globalmarkets.anyoption.com

Overall, the index remains in its trading range since February but upward momentum remains intact. Note:

• The index closed the week within its double Bollinger band buy zone (bounded by upper orange and green Bollinger bands) suggesting strong upward momentum (see 4 RULES FOR USING THE MOST USEFUL TECHNICAL INDICATOR, DOUBLE BOLLINGER BANDS)
• All exponential moving averages are trending higher, with the more responsive shorter durations crossing above the longer duration EMAs  and climbing faster (10 week EMA (dark blue) crossed over 20 week (yellow) which crossed over 50 week (red), while the longer term 100 week EMA (light blue) crossed over the 200 week EMA (purple).
• Support at 1364 has held firm since February.

Given the disturbing fundamentals (which ultimately drive technical trends) we are reluctant to add new long risk asset positions. However as long as the 1364 support holds we’ve no meaningful sell signal.

Once that support is broken, we’ve a series of support levels from the 20 and 50 week EMA, soon followed by the 61.8% Fib retracement of the rally that began in September 2011. That means shorting risk assets and currencies is hazardous for longer term positions, but ok for those holding for a matter of hours or a few days.

 Diversify By Currency As Well As By Asset & Sector Class

One of the repeating themes we see above is that in the EU, US, Japan etc, the risk is high for more central bank policies that should bring a long term loss of purchasing power in these currencies.

To protect yourself against the risk of crashing markets and currencies dragging you down with them, the best help I can offer you is, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It’s the first  forex book ever published to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details.

The best way to fight central bank anti-saver policies is vote with your feet and move into assets denominated in currencies of fiscally responsible nations.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

COMING WEEK MARKET MOVERS: 10 REASONS THIS WEEK COULD BE HUGE is a post from: Global Markets

The following is a weekly summary and strategy guide for traders and investors, covering prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options.

Let’s look at the past week’s market movers on a day by day basis.

1. Monday: Market drop hard due to a combination of:

1. Bad data:  weak EU and China Mfg PMIs, poor Spain GDP put it back into recession
2. Unsettling political developments: in Holland (government falls over austerity dispute) and France (victory by anti-austerity/EU fiscal pact candidate) drive markets lower.

2. Tuesday: Bond auctions of Spain, Holland not as bad as expected, meaning that markets were happy they there was demand, even if at the cost of continually rising bond yields. Continued overall good earnings results helped.

3. Wednesday: AAPL earnings and Fed keeping alive hope for QE 3 if needed, outweigh bad data (UK slips into recession, US durable goods missed forecasts badly).

4. Thursday: Most risk assets up as better than expected housing data overcame weak US weekly jobless claims and EZ economic confidence

5. Friday: Strong earnings from internet retailers Amazon and Expedia outweighed a weak US GDP report.

Lessons & Ramifications

Here are the big take-away lessons of the past week.

The Ongoing Risk Rally: Why We Don’t Trust It

We may continue riding this rally but we don’t trust it. Here’s why.

1. Short Term: Excessive Hope, Selective Perception

Risk assets are up, with the bellwether S&P 500 up 1.8%, and just over 11% under its pre-crisis 2007 highs. This is remarkable considering that the data this week was mostly bad, highlights include:

• Poor PMIs in China and Europe as both economies continue to weaken
• Mostly weak US data including jobless claims, a huge miss in durable goods, and weakening GDP
• Spain and the UK slip back into recession
• EU crisis continues its slow deterioration as Spanish and other EU bond yields continue higher

In other words, every big economy looked flat to worse this week, yet risk assets rose nonetheless.

So what’s keeping markets aloft? We’re read the bullish arguments but they leave us unconvinced.

Over the past week the likely cause is a combination of low expectations and hope. More specifically:

• Earnings: Of the 287 S&P 500 firms that have reported thus far in Q1 2012 earnings season so far, about 73% have topped estimates. Despite the fact that everyone knows these estimates are kept low in order to facilitate earnings beats, markets chose to take them at face value. In addition, forward guidance is also beating low expectations, though with employment and wage growth in the developed world weak, we continue to wonder how that can continue.

• Markets ignore rising bond yields in Europe, the classic warning sign of more EU angst coming, and were happy that Spanish and Dutch bonds sold at all.

• Both US and Japanese central banks keep hopes for more stimulus fed rallies alive.

2. Longer Term: A Rally Based On Government Intervention Rather Than Actual Wealth Creation

In trying to explain the rally over the past months, we have to look deeper.

The global economy does not  look nearly as good as it did just before the financial crisis hit in late 2007,  yet most risk assets, as represented by major stock indexes, are priced almost as high.

Frankly we’re a bit baffled. We can only speculate that the cause of the rally is a combination of

• Ongoing stimulus (and hopes for more) that keeps cash coming
• Low rates that encourage deploying that cash into stocks and other risk assets rather than bonds

The selloff in the USDJPY despite the “risk-on” mood suggests markets are anticipating QE 3. We suspect this is hope is premature. The US economy is struggling but the Fed has indicated it won’t deploy a new stimulus package unless things get much worse. For now, however, the US is muddling through, not in crisis. Jobs growth and spending are not collapsing, and GDP is still growing.

Expect earnings to start losing their impact now that the third full week of earnings season is over. See Part 2, on coming week market movers, for what’s likely to be driving markets next week. Here’s a sneak preview.

This Week’s ECB Meeting – Inaction Risks Next EU Driven Selloff

The unifying theme behind the Monday fall of the Dutch government and French Presidential election results was the EU’s Fiscal Pact. Hollande won in France on an anti-austerity, anti-Fiscal Pact stance, and the Dutch government fell because the coalition could not agree on how to reduce the fiscal deficit to 3% of GDP next year. Add to the above that Spain is now back in recession, and the comments coming out of the ECB meeting for clues about what action its considering become potentially very important. As suggested last week ECB President Mario Draghi, the EU desperately needs a growth pact to serve as a carrot to balance the Fiscal (read: more austerity) Pact’s stick. Unless the EU can offer the GIIPS some genuine help in getting GDP up, they may resist taking further steps to get debt down. In other words, if the EU can’t offer the GIIPS growth to ease the pain of austerity, the economic health of the EU will continue to deteriorate This past week George Soros suggested that the EU risks a Soviet Union style collapse from the deep social, economic, and moral crisis it’s now facing.

Diversify By Currency As Well As By Asset & Sector Class

One of the repeating themes we see above is that in the EU, US, Japan etc, the risk is high for more central bank policies that should bring a long term loss of purchasing power in these currencies.

To protect yourself against the risk of crashing markets and currencies dragging you down with them, the best help I can offer you is, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It’s the first  forex book ever published to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details.

The best way to fight central bank anti-saver policies is vote with your feet and move into assets denominated in currencies of fiscally responsible nations.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

PRIOR WEEK SUMMARY & LESSONS: Two Reasons To Doubt This Rally is a post from: Global Markets

The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week’s market movers and trade ramifications

1. Market reaction to IMF expanded war chest for EU crisis

With the IMF getting its desired bailout fund increase, this could be enough of a reason to give markets a boost early in the week as it could be enough of an excuse for a bout of EU optimism now that there’s enough cash on hand to deal with Spain. As noted in Part 1, conservative estimates suggest a Spain bailout could total

As always, stay alert for movements of bond yields and CDS spreads on GIIPS debt, should these start moving, that alone can move markets.

2. FOMC Meeting & Press Conference Wednesday

The meeting is not expected to yield any change in Fed policy, but markets will nonetheless be sensitive to even minor hints of possible changes. Bernanke is expected to sound less optimistic than he did last month.

Still, the consensus is that there will be no new easing unless things get much worse for the US, especially because it’s far from clear that QE has done more harm than good. Indeed, it’s hard to see how lowering borrowing costs improves things when most of the US is still trying to reduce debt.

The expected dovishness could further pressure the USDCAD, because the BoC is expected to raise rates.

3. Earnings Season Week 3

Earnings reports have one more week of influence. They tend to be influential for the first three weeks of reporting season, after which time the theme is set.

4. Election Results In France, Greece

Both are more likely to yield anti-market results, if anything, and pressure the EUR.

5. Other Top Calendar Events

Top events of the week include:

Monday

A big day for manufacturing PMIs. By themselves not dominant news, but if they all show the same theme they could indeed set market mood.

Australia: PPI – the RBA is already considering further easing, and that will become more likely if inflation remains a non-threat.

China: HSBC flash Mfg PMI

EU: French, German, EU Mfg PMIs

Tuesday

UK: Public sector net borrowing

All: G-7 Meeting – look for more spin control to calm markets about Spain and the rest of the GIIPS

US: New home sales, CB consumer confidence

Wednesday

UK: Preliminary GDP- expected to show a modest increase. The GBP has been on a tear recently, and this may signal profit taking time for the shorter term positions.

US: Durable Goods, FOMC press conference (see above)

Thursday

US: Pending home sales, weekly first time jobless claims

Friday

Japan: BoJ rate statement and press conference: further easing steps expected, good for stocks and other risk assets, bad for the JPY bulls.

US: Advanced GDP

One of the biggest lessons of recent years is the need to protect yourself against the risk of crashing markets and currencies dragging you down with them. The best help I can offer you is, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It’s the first  forex book ever published to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

BRIEF WEEKLY PREVIEW APRIL 22-7: Five Things To Watch Next Week is a post from: Global Markets

The following is a weekly summary and strategy guide for traders and investors, covering prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options

First some background. The three big macro-economic themes in global markets are all bearish. These are:

• Currently hawkish policy bias among most major banks, as most hold steady or seek to tighten: The BoJ, RBA being the big dovish exceptions.
• The ongoing deterioration in the EU crisis: Bond yields for the too big to bail/fail nations of Spain and Italy are up, their markets are down, and no solution is in sight. Indeed, the most recent band-aid, the LTRO, has raised the danger of an EU banking collapse and massive taxpayer funded bailout; because the struggling banking systems of Spain and Italy, among others, are not more loaded than ever with their own nation’s steadily depreciating bonds of questionable creditworthiness. Insolvent banks have been put in a deeper hole.
• China slowdown: The biggest growth engine is slowing, the only debate is over how badly.

Yet the bellwether S&P 500 remains within the same (roughly) 1350-1400 trading range since mid-February.

In Sum, No Big Market Movers This Week

Despite these three bearish themes, most markets kept to a tight trading range this week, so one can’t really say there were any major market movers, because markets didn’t move much. Except for a minor rally Tuesday and Friday, for which I could find no convincing explanation, most of the major benchmark global indexes closed each day flat of slightly lower.

Before we can discuss why markets remain aloft despite the bearish fundamentals, we need to review the prior week’s highlights.

The week’s top market concerns:

• EU concerns dominated all week, mostly regarding Spain, but Italy, even France at times gave cause for concern.

• Others: After the EU, the other major market movers were data and earnings, which provided an excuse for modest Tuesday and Friday rallies in the major global indexes.

See the concluding section for what’s really keeping markets aloft.

1. EU Crisis: Mostly Spain, But Italy, Even France Give Cause for Concern

The EU is of course still the big risk, and is due to get worse. But for all the headlines, it didn’t move markets much.

Summary: In essence, all showed rising bond yields, with Spain’s benchmark 10 year note yielding 5.74% (vs. 5.403% in January) at the most recent Thursday auction though all week it flirted with the psychologically important 7% level at which Greece and Portugal surrendered and sought bailouts. The problem is, Spain’s debt load is too big for the EU’s current bailout funds to handle. French and Italian bond yields also edged higher. Highlights include:

• With yields on its benchmark 10 year notes at times over 6% and threatening to hit the unsustainable 7% level, Spain’s troubles are to be the chief concern at the weekend G20 summit and prime reason the IMF seeks to expand its war chest to $400 bln

• Austerity cure is killing the patient theme: Goldman Sachs concluded that Spain’s lack of competitive economy required a 20% currency devaluation but has no currency of its own to devalue, and that austerity is causing growth to fall just as fast or faster than debt, meaning that Spain gets poorer yet makes no progress reducing its debt/GDP ratio. FT.com’s Wolfgang Muchau’s article that same day had the same conclusion.

• Spain managed to sell bonds at its auctions on Tuesday and Thursday, but at a cost of steadily rising yields that it can’t afford. Expectations were low enough that markets were satisfied that the sale went off at all, and chose to ignore the rising rates for now.

• The IMF announced that both Spain and Italy will miss their deficit targets in the coming years. Banks of both nations show spiking bad loan rates, with Spain’s at an 18 year high, and likely to get worse given that its economy shows no signs of bottoming.

• Carmel Asset Management came out with a series of reasons why, as bad as Spain’s economy seems, it’s in fact much worse. Quoting from a zerohedge.com summary, these are:

1. Spain’s national debt is 50% greater than the headline numbers

Spain’s debt-to-GDP balloons from 60% to 90% of GDP with regional and other debts

2. Spain’s housing prices will fall by an additional 35%

Spain built one house for every additional person added to the population during the past two decades; the fall will decrease GDP by ~2% each of the next two years

3. Spain has “zombie” banks with massive loans to developers and to homeowners

Banks have not begun to realize losses and are vastly undercapitalized

4. Spain’s economy has not stabilized and will continue to deteriorate

Spain has the highest unemployment in the developed world, one of the highest overall debt loads, and the most uncompetitive labor market in Europe

5. The EU will not have the firepower or political will to bail out Spain

Rescue fund headline numbers are misleading and count capital that is not yet committed

And here are the problems that will manifest themselves over the next 12 months:

• Spain’s true debt burden will pass the 90% “tipping point” identified by Rogoff and Reinhart
• Housing prices will fall further and faster than anticipated (consensus is 15%; CAM estimate is 35%)
• Banks underestimate the residential real estate loan defaults (consensus estimate is 2.8% vs. CAM estimate of 11%)
• Expected housing price depreciation and loan defaults will deepen Spain’s recession (additional 2% contraction in 2012 and 2013)
• Spain will need to refinance €186.1 Billion in 2012 alone

End result: surging CDS and/or plunging bond prices, if faith in the sovereign CDS market continues to be at rock bottom lows courtesy of ISDA nearly blowing its own head off.

Again, hat tip to zerohedge.com for alerting us to this.  This was the most useful article for the week, reminding us that what happens in Spain will likely decide the fate of the EUR and EZ as we know them.

Estimates vary for the ultimate cost of a bailout for Spain. Without taking into account costs for other bailouts that might follow (think Italy) as a result of rising market fear that such an event could cause, the consensus appears to be between $460 and $500 billion.

Given the relative calm, markets appear convinced the cash will be found (or printed). With the IMF now loaded up with $430 bln in bailout cash, together with the EU, the two are ready to provide a rescue package if needed.

2 & 3: Other Market Concerns: Data, Earnings

We won’t waste your time. These seemed to simply provide additional excuses for the market going down, up, or nowhere, depending on daily sentiment about Spain. Data was lackluster. About 81 out of 121 S&P companies beat earnings expectations, but of course markets understand these forecasts are kept low to allow easy beats, and so the seemingly great “beat rate” evoked little reaction.

Lessons and Ramifications: The Fourth and Most Important: Markets Believe Governments Will Provide Rescue

Given the overall bearishness, we must ask, what’s keeping markets from retreating? Here are a few ideas.

Hope that the weekends’ G20 boost to the IMF war chest $430 bln should allow it, with some help from the EU, to meet the $500 bln cost of a Spain bailout.

Even if they ultimately fail, they can keep deferring the day of reckoning for a while, especially with the US in an election year and thus likely to do what it can to keep things stable until after the November 2012 election. Indeed, Gary Shilling wrote last week in Bloomberg that low rates and the hope of more QE from the Fed were the main props to the market at this time.

So what do we actually do? For now, we wait. Things are calm for now but risk seems well loaded to the downside for risk assets. However we hesitate to start shorting risk assets until the markets start moving that way.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

Prior Week Summary: The Four Top Concerns On Markets’ Minds is a post from: Global Markets

The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week’s market movers and trade ramifications

As we noted last week, the EU crisis is showing signs that it may again pressure markets on rising concerns about Spain, Italy, and Portugal. Sure enough, the EU again moved to the forefront of investor concerns last week.

Yet in the coming weeks, US Q1 earnings season may actually be the bigger market mover.

As we’ll discuss below, there are 4 big likely market drivers,  all distinctly bearish.

Indeed, the most bullish factor over the coming week may be if markets ironically react to the bad news as good news because it raises hopes for new central bank stimulus.

So let’s dig right in.

1. Signs of Trouble For Q1 Earnings Season

Global stock indexes have just finished one of their best quarters in years, with the bellwether S&P 500 up about 16% thus far, despite slowing growth in most of the world and the ongoing EU debt crisis. However the party may soon come to an end.

First quarter 2012 earnings season, which begins in just a few weeks, is shaping up to be the worst since the financial crisis.

Projections for first-quarter earnings growth are running as low as 0.5 percent, according to Standard & Poor’s/Capital IQ. And that’s after a mediocre fourth quarter from 2011, indicating that the days of big earnings improvements that followed the depths of the 2008 financial crisis are over.

The level of negative preannouncements at their highest level since the March 2009 market lows, as companies try to lower expectations and avoid the kind of negative surprises that can spark selloffs.

Yet Hope Remains

However it’s uncertain what that will mean to the stock market and its bull run that began in October.

After all, stocks have powered higher before without the benefit of strong earnings to back them up. There are many analysts who believe the same thing could happen this time. There are real reasons for their bullishness.

• Some justify this belief by pointing to how much better yields are from stocks versus those of investment grade bonds.
• Others point to the enormous amounts of cash sitting on the side, waiting for fears about Europe or China to subside.
• Others note that the overall weak performance of most major economies suggests more stimulus programs coming. In recent years, new stimulus programs have consistently sent risk asset markets higher despite ongoing deterioration in Europe and in global growth. Note how markets have at time moved higher on poor US or Chinese data, because that raised expectations for new stimulus from the Fed and PBOC. The Fed clearly believes more such programs may be needed.
• And for the real cynics, there is the assumption that analysts could lower expectations yet again in order to make it easier for companies they cover to beat forecasts.
• US rail traffic continues to show impressive numbers, with building materials like metal and stone leading the way, suggesting ongoing improvement in construction and thus the general economy.

However, Risk Assets Due For A Correction – Weak Earnings May Be The Catalyst

With the bellwether S&P 500 up 28 percent in five months, after having come so far so fast, it’s vulnerable to a selloff from any major disappointment.

The stage for a disappointment from earnings is certainly set. While 63 percent of S&P 500 companies beat earnings estimates in Q4 of 2011, those beats were mostly due to lowered expectations. Moreover, if we subtract the contribution from Apple and Caterpillar’s stellar earnings, the aggregate rate of companies beating expectations was about 55%. Not so encouraging.

In this upcoming period (earnings season officially starts April 10 when Alcoa (AA) reports.

Many analysts believe that most of the 10 S&P 500 sectors are likely to see earnings overall earnings declines.

Not surprisingly then, with markets at multi-year highs, many could be tempted to take profits.

If the tone of earnings seasons turns bearish, and that trickle of selling could turn into a flood if the tone of the first three weeks is disappointing.

2. Delayed Reaction to Poor US Jobs Report

The US jobs report Friday posted missed expectations by 41%, for its worst performance since early 2009, with only 120k non-farms jobs added vs. 205k expected, a nasty 41% miss. Most markets were closed for the Easter holidays, so most of the reaction will felt early this week. While the unemployment declined from 8.3% to 8.2%, that seemingly bullish figure is being discounted as the result of discouraged workers leaving the workforce rather than any genuine decrease in unemployment.

What Does It Mean?

Forex: The USD is likely to suffer because bad US jobs reports hit the USD with a double whammy:  lower rate hike hopes and higher expectations for more stimulus, both bad for the USD. The best hope for USD bulls is for more trouble in the EU that sends traders back into the relatively safer USD. Risk currencies should also suffer from the news. The big near term beneficiaries should be the other safe havens, and the EUR, simply because a declining USD tends to help the EUR.

The impact on equities is harder to call. While the news is clearly risk off and so should be bearish for stocks, if markets believe that the chances for new stimulus from the Fed are now significantly higher, then we could again see equities up on otherwise negative news. We’ve seen this “bad news is good news” kind of reaction before in recent weeks.

3. EU Crisis Related News

With markets increasingly nervous about Spain and Portugal, further bond auction results and related news (such as the poor Spain bond auction last week from any of the GIIPS) could easily move markets.

4. Risk Asset Markets Remain Near Multi-Year Highs

That simple technical fact makes investors more prone to take profits if there’s any sign of trouble, and thus may amplify the negative reaction from the other big three bearish market movers noted above.

Other Likely Market Movers From Calendar Events

Looking at the week’s economic calendar, here are the most important events to watch. It’s a relatively light week for economic events, but unusually packed with data from the world’s top growth engine, China.

Monday

• Europe: Most European markets are closed for the Easter holiday, suggesting very quiet trading.
• China: Reaction to a batch of data released Sunday night GMT. It’s mostly second tier data, but also includes an important report on new loans that offers insight into monetary policy. Also CPI, PPI reports; if these show inflation quiet, that raises the chances of more stimulus and easy money from the PBOC.

Tuesday

• China: trade balance
• Japan: BoJ monetary policy and monthly interest rate statement and press conference may offer clues helpful for those trading JPY pairs.
• All: G7 Meeting- Given the recent contagion fears about Spain and Portugal, this meeting may offer some guidance about whether the EZ’s leadership has plans for new action.

Thursday

• Australia: March jobs reports – unemployment rate, employment change

Friday

• China: Another batch of data, including real Q1 GDP, retail sales
• US: CPI, UoM Consumer confidence

Lessons and Ramifications

The prior week brought the most significant drop of 2012 in the bellwether S&P 500, primarily from hawkish comments from the FOMC March meeting minutes Tuesday and poor Spain bond auctions later last week.

As noted above, this week’s market movers have a distinctly bearish tone. Delayed reaction to the poor US jobs reports, anticipation of lukewarm US earnings, and fears of more trouble from the EU all provide an excuse for further profit taking in stocks and other risk assets.

Perhaps the most bullish question is, will the markets react to the bad news as good news because it raises hopes for new stimulus?

Selling Lifeboats On The Titanic

Central bank policy remains arguably the single biggest short term market driver in most major economies and for most major currencies. Virtually every major central bank is trying to inflate away its debt problems via historically low rates and continued stimulus programs that threaten the value of their currencies and anything denominated in them, including your assets. We all need currency diversification just as we need asset and sector diversification.  However traditional currency trading doesn’t work for most investors. The best help I can offer you is THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It’s the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details. Call this naked promotion, but I feel like the guy selling lifeboat reservations on the Titanic.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

Coming Week Market Movers: 4 Reasons To Be Bearish is a post from: Global Markets