The start of the week will likely prove to be the worst part as Europe, China, and US concerns will all be front and center.
With no central bank cavalry set to arrive this week, the markets will not be bailed out and must probe new levels to adjust for the added risk premium.
This should see a test of the 1.2000 in the EUR/USD , a test of the 1,325 level in the S&P and a test of the 1.35% on the US 10 year note.
The sequence starts with last Friday’s announcements by Spain that they would not be able to fund themselves at 7.0% 10 year bonds and the asking by the regional government of Valencia for a bailout. The latter has led to Catalonia saying it will considering asking for assistance and newspaper El Pais adding that 4 additional regions may step up for cash as well. Finally, Spain announced that they are downgrading their assessment of the economy with GDP (explain this) to -0.4% from -0.3% Q1. Today, CDS for Spain soared to 634 basis points as the 10yr bond interest rate soared to 7.40% and IBEX dropped close to 4%. The Spanish stock market is now rallying back on the announcement that Spain is banning short sales.
Greece was in the negative news flow starting on Sunday when Der Spiegel had an article stating that the IMF may not be sending additional funds to Greece. Subsequently, this was denied by Germany and the IMF stated that they are starting discussions with Greece on July 24th to get them back on track. Germany’s Economic Minister Phillipp Roesler said stated that he didn’t think Greece would meet their obligations and the head of the Syriza party said that the current Greek government had a plan to leave the Euro and return to the Drachma. Piling on, Greek PM Samaras said that Greece was in the throes of a 1930s style Great Depression.
According to a Chinese central bank adviser, China’s Q3 GDP may be 7.4% or lower with a period of deflation possible. According to Bloomberg, “Song Guoqing, a newly appointed academic member of the People’s Bank of China monetary policy committee, also warned that a decline in producer prices in tandem with consumer inflation may hurt investment returns of industrial companies.” Guoqing was also quoted as saying that further rate cuts will be difficult because consumer price growth remains high. Apparently, nature wanted to intervene as well by flooding Beijing with 16 inches of rain in a 24 hour period that killed 37 people.
This all combined to lead a big surge in Risk Off trading. The selling for the week should culminate over the next 24 hours as flash PMIs will be released for China, Europe and the US. All three could be ugly. The HSBC flash Chinese PMI is one of my favorites for a more accurate assessment of the economy and is out late tonight. After these, the biggest event for the week will be the US GDP data on Friday. This is already expected to be soft at 1.5%. Reflecting this, JPM just downgraded their assessment of the US GDP for Q2 to 1.4% from 1.7% and Q3 to 1.5% from 2.0%. (BMO’s are: Q2 1.7%, Q3 2.2%, Q4 2.0% and Q1 2013 1.3 %.)
The point is that by the time Friday’s data comes out, it will have been fully priced in and the market reaction should be muted. Then the attention will firmly turn the FOMC on Wednesday with the ECB and BOE on Thursday.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.