Saturday, October 1, 2011

Global Markets Update - 1st October 2011

So the drama over the Eurozone crisis continues. SMI managed to post the counter-trend rise high of 5600 levels and DAX followed as well. Immediately the profit booking also came in. Likewise for the Dow, a counter-trend rise above 11k levels came in from the support levels of 10250-500 zone. Both for European indices and Dow, till critical support levels hold, such counter-trend rises may continue to come

Critical Support levels as follows
FTSE - 4900 and to the extent that holds, one can expect 5200-5400 levels resurfacing before a final breakdown.

DAX/SMI - Both have critical supports at intermediate levels in the 5000-5100 zone. To the extent these levels hold out, counter-trend rises to 5400-5600 levels will keep resurfacing before a final breakdown.
[Eventual targets are 50% of highs of 2011]

CAC40: On its path ro 2k levels but will take some more time depending on how SMI and DAX shape up.

Ibex35: On a set path towards 5500 levels but for now, range stays in the 7500 to 8700 levels.

Dow: 10250-10500 levels should hold out for the next 6 to 8 weeks.

I had indicated that the Greek bailout [which is a bailout of previous bailout to ensure some interest payments are made] will go through as the Eurozone think tank wants to get through a good recapitalization of European banks following an orderly default of the Greek sovereign debt. The hunger for yields ended up with a lot of high yield bonds to which a lot of banks have taken exposure to. Despite the bailouts, yields are simply unrelenting to the downside and CDS premiums continue to rise.

Now there are other potential actions that market think tanks are contemplating - for instance, forcing a yield cut on the bonds to reduce the interest burden on other European countries and banks to Greek debt. Whilst this may solve some problems of the debt part of the Eurozone, the stock markets will be badly badgered IMHO. They will rise for a very short-term and then nose dive to make up for the overall portfolio losses.

The dollar being the reserve currency of the globe will continue to spook up the dollar index towards 81 levels. Margin calls are certainly being triggered on the bourses due to excessive leverage on the system. The larger game going on both sides of the Atlantic is simple - if US can print money, we can print money too; despite all the repeated failures of QE, the leaders don't want to let the pain get over once and for all and revisit the drawing board on how to determine long term productivity and GDP growth can be fuelled. People want to continue with useless financial engineering that will only increase challenges on a brief period of hyperinflation and then a prolonged bearish deflationary phase.

One major divergence in the currency space is USD-JPY at present. USD gained significantly over AUD, CAD as expected and against CHF, it was artificially introduced by Swiss bankers. However, despite such a rise in Dollar Index, USD is falling against JPY and this pair probably is the next major one where JPY is set to collapse and revisit the 90 levels from the current 76-77 levels.

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