Strange Turn of Events May Have Saved Euro Bulls

I’ve always been fascinated by the speed investors can turn a market from bearish to bullish. It was only seven sessions ago that the Euro was trading near a 6 ½ month low against a dollar. At that time, the headlines were saying investors were taking a grim view on the prospect of fresh elections in Italy.

Articles were being written about the possibility of Italy leaving the European Union and the Euro Zone. Such worries triggered a big sell-off of Italian debt and a surge in safe-haven German bond prices. As a result, the yield spread between 10-year German and Italian bonds was at its broadest since December 2013.

Some traders said the news caught market participants off guard. They also feared the worst because investors were holding on to huge long Euro positions that had been built up during the currency’s bull phase until May. The liquidation could’ve lasted indefinitely if these longs were forced to liquidate during a prolonged Italian crisis.

European Bank officials were very quiet during the tumultuous times in Italy. I think this was because without a government in place, the ECB had little room to act.

Internally, the ECB may have a set a deadline for a response, but conditions changed rapidly in Italy and the central bank never made its presence felt, at least publicly.

I think Draghi and the ECB would’ve had eventually moved on the crisis. After all it is still buying Italian debt as part of its 30 billion Euro-a-month quantitative easing (QE) program but this buying didn’t seem to limit any of the damage in the Italian bond market.

Fast-forward to this week’s events. Early in the week, the story broke that the ECB was going to release the time table for ending its stimulus program. With this news, interest rates in Italy and Germany rose as well as the Euro.

I’m still trying to figure out how the ECB went from potentially taking control of the situation in Italy to announcing the end of its stimulus program. Perhaps it was politics that drove the ECB to act so fast on ending the stimulus. Perhaps they needed to bailout the longs in the market who were facing the possibility of a prolonged move down in the Euro. We may never know.

U.S. Equity Markets- Danger Risk Ahead

The major U.S. stock indexes are trading higher early Thursday. Momentum from yesterday’s rally supported the indexes earlier today, but they received an additional boost just a short while ago when the U.S. announced a deal had been struck with Chinese telecom giant ZTE to end crippling American sanctions, Commerce Secretary Wilbur Ross told CNBC on Thursday.

The U.S. stock market is up seven sessions from its most recent bottom. An early spike in prices today could put the indexes in an overbought position. Furthermore, today’s good news may exhaust the market on the upside which will make it vulnerable to a reversal late in the session. Additionally, we may start to see position-squaring and profit-taking ahead of the G-7 meeting.

Given these factors, don’t be surprised if today’s rally stalls at the mid-session and prices tumble into the close.