Signs that bearish sentiment may be wearing a bit thin

The Facebook IPO today has temporarily knocked Europe from the headlines as the world’s eyes are focused on the Nasdaq at 1430 GMT/ 0930 ET when Facebook will start trading for the first time. CNBC anchors have been wearing honorary hoodies to mark the occasion so it must be big. I still find it hard to reconcile how FB is worth $140 billion when the site is used by both advertisers and cyber bullies, but perhaps I’m missing the point. The point today is that it is the third largest IPO in the US ever, Zuckerberg will be a gaszillionaire and U2’s Bono is likely to earn $1.5bn from his initial $90 million investment. Facebook might not change the trading world, but it could change the Forbes rich list quite dramatically.

Could Facebook save Europe?

On a serious note, I will be looking at the NY markets tonight to see where FB closes. It will list at $38 per share, and whispers suggest it could go as high as $50 first thing. I am particularly interested in FB because I believe that its IPO hype is helping to fuel some of the recovery we have seen in the markets this morning. EURUSD is back above 1.27 and European stocks have clawed back all their losses form earlier when it looked like we were headed for a down day. Interestingly, even after 16 Spanish banks were downgraded by Moody’s, the Bloomberg European banking sector led the recovery after a sharp move lower initially. Since the focus has shifted in the last couple of days from the Greek election re-run to the state of Europe’s banking sector and the prospect of contagion spreading from Athens to Madrid, this index is one of the first things I look at when I come in as it has been a fairly good indicator of market sentiment in recent days.

The bears take a breather

The recovery that we have seen today is a pullback in our view, as we still expect the euro to grind lower and risk assets to remain vulnerable. However, the markets were starting to look particularly oversold on a short-term basis. The commodity currencies/ yen crosses were the first to recover this morning along with NZDUSD and AUDUSD, which is back above the 0.9850 after falling below 0.9800 yesterday. The commodity bloc had fallen too far too fast so a pullback is completely natural at this time.

Likewise, in EURUSD the daily RSI has turned higher, this suggests that the pullback could stretch into next week. Not only are euro short positions as measured by the CFTC close to their highest levels ever, but the fundamental picture is showing tentative signs of shifting. When the market is positioned so heavily one way it can be a signal that the tide is about to change. Likewise, if we get some soothing words from Merkel, Obama and co. at this weekend’s G8 summit then we could get a mini relief-rally at the start of next week.

Market moves

The markets always move faster than politicians, so the weakness we have seen in risk assets since the Greek election result priced in the prospect of a Greek election re-run and the potential for further political uncertainty in Athens. Thus, any signs that Germany might be softening her stance towards austerity could be enough to spark a relief rally in the short term. However, we don’t believe the outcome of the Greek elections is priced in, and since the Greeks have a blackout on pre-election polls in the two weeks leading up to voting day, we expect more volatility in the coming weeks.

So what impact could a relief rally have on the major asset markets in the coming days? In EURUSD, above 1.2750 we could see a recovery back towards 1.2865 – the 200-hour moving average. The Aussie dollar is looking particularly oversold, and may trace back to 0.9912 to start with (daily pivot) and then potentially to 0.9990. But for any relief rally to have legs we would need to see the Spanish Ibex stock market recover from decade lows. We don’t think that a sustained rally in this index is likely, which may spark the bears to re-enter short positions at a better level. As we have said, even in the steepest bear markets there are poll-back and consolidation periods so the current market action doesn’t mean, yet, that things have fundamentally changed in the currency bloc.

I’m still keeping an eye on EURCHF. It remains stuck in a mini range as investors’ edge closer to the SNB’s 1.20 floor. Testing the Bank’s resolve is not for the faint hearted, as the SNB has pledged its credibility on maintaining the floor and it still believes the Swissie is overvalued. Thus, a move below 1.2005 could trigger SNB buying. The first resistance level of note is 1.2020.

Source: Forex.com

18.05.2012