Draghi Hopium Pushes The Market Up Again

July 26th, 2012
in Gary's blogging

Opening Market Commentary For 07-26-2012

Just like old times premarket euphoria was boosted up pushing the DOW up 115 points and the SP500 16 points at one point. The cause was that Spanish borrowing costs are back below 7% and the Hopium blubbering of European Central Bank President Mario Draghi of good things to come. At the US session opening the Euro was at 1.2293 and the USD plunged to 82.82. This helped trigger a number of bearish signals for our premium subscribers to consider.

The Durable Goods came in high at 1.6% while expecting 0.3%. However, that number changes with the reporting 'Ex Transportation' dropping a whopping -1.1% while expecting 0.1% over the last report of 0.8%. Other numbers average out as 'not so good' as seen in the chart below while some analyst say they are “Better than expected”. Medium importance report on US Pending Home Sales at 10 am came in lower than expected at 8.4% while expecting 12.1%. The prior reading was (again) revised to 14.7.

Follow up:

U.S. Jobless Claims drops 35,000 to 353,000 and Continuing Clams (July 14) falls to 3287K Vs. 3300K expected. Prior week revised to 3317k from 3314k.

The first column is what was reported this morning. The second is what economist expected and the third is the last reporting.

Reported at INO. (I just love it when adjectives like 'sharp drop' are used while describing a mediocre movement.)

The strong upward momentum for the markets is partly due to a positive reaction to comments by European Central Bank President Mario Draghi, who promised to do what is need to support to beleaguered eurozone.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Draghi said at an investment conference in London. "And believe me, it will be enough."

Positive sentiment has also been generated by some relatively upbeat economic data, including a report from the Labor Department showing a sharp drop in initial jobless claims.”

After the 10 am housing 'Big Misses' the market dropped from the morning highs in quick fashion. What is important is how the DaBoyz are going to handle the rest of the day.

The DOW at 10:15 is at 12903 up 227 or 1.78%.

The 500 is at 1358 up 20.77 or 1.55%.

The $RUT is at 778.60 up 9.26 or 1.20%.

SPY is at 136.05 up 2.09 or 1.56%.

The trend is up and the current bias is up.


WTI oil is at 90.21 trading between 88.10 and 90.45 and the bias is positive.

Brent crude is at 105.86 trading between 103.50 and 106.15 and the bias is positive.

Gold is up today at 1619 trading between 1601 and 1621 with a positive bias.

Dr. Copper is at 3.42 up from 3.36 earlier.

The USD tumbled from 83.84 in the premarket hours to 82.67 and recovered to 82.75. As it dove it covered the gap at 83.61 in a spectacular fashion.


The market euphoria doesn't change some of the facts. Greece is still in trouble, as is Spain. Open Europe walks us through some of the key issues surrounding Spain in a note today:

Between now and mid-2015, Spain’s funding needs stand at €542bn, with its banks needing a cash injection of an additional €100bn. This compares to the combined lending power of the EFSF and the ESM, which will only reach €500bn in mid-2014.

If Spanish regions continue to rely on the central government to finance them, this could add another €20bn to Spain’s funding needs – a relatively small amount equivalent to around 2% of Spanish GDP. The main concern with the regions is the continuing damage to confidence caused by Madrid not being able to rein in spending and exert political control.

Of the 17 regions, Open Europe estimates that seven have unattainable deficit reduction targets this year, as they are expected to make cuts worth over 2.5% of their GDP. Some of the larger regions have significant amounts of debt to roll over this year. Catalonia, for instance, must refinance over €5.7bn in maturing debt before the end of the year.”


Some Context On Europe's Sovereign Rally This Morning

As panties are being thrown at the feet of Mario Draghi all around Europe, and his comments are being heralded as 'confirmation' of Nowotny's restatement of absolutely nothing yesterday, we thought some context would be useful before we all cheer that all is well.

Spanish and Italian 10Y bond spreads are still notably wider than the pre-EU-Summit 'panic' levels and dramatically wider than the post-EU-Summit best levels.

Spain 2s10s, having flattened from 220bps to 60bps in a week has squeezed back up to 128bps as we can only imagine the bath-salting that caused a few people.

The point is that this kneejerk reaction in an incredibly illiquid market at the front-end of the Spanish curve is nothing to rest your hat on yet. In fact, if there are more hints dropped of ECB restarting SMP then we suspect European asset managers will run to sell down their Spanish bonds to try and front-run the subordination this implies at the inevitable restructuring (as game-theoretically they know everyone else will also do the same).”

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Written by Gary

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