Retail Favors EUR Shorts

Global policy makers are setting the groundwork for some sort of coordinated intervention if need be. Anyone and everyone who has direct domestic policy influence have been standing on their soapbox as the market sounds off the remaining few hours of this weeks trading. The Central banks from major economies stand ready to take steps to stabilize financial markets and prevent a credit squeeze should the outcome of Sunday’s Greek elections cause further financial stress.

Greece is not the problem, it’s Spain. Despite Europe continuing to give the impression that it is only capable of dealing with one issue at a time, even coming late to this weekend’s party is bringing some sense of order and less volatility. In the latter half of this week the market has been living with the risk of periodic squeezes on record short risk positions. The bulk of investors remain married in their beliefs that the momentum will favor dollar and yen positions in the second half of this year. Without aggressive new policy initiatives, bond market access for both Spain and Italy will be a problem and weighting portfolios heavy in both these currencies is a tactical play on further deterioration in risk conditions and rising expectations for monetary easing in the G10.

Central bankers are doing what they are supposed to be doing, and thats providing stability and a sense of calm. They are trying to stimulate a market that risks being overwhelmed with bad news from Euro fears, an Asian slowdown and a significant fall in US confidence. It’s a tough task to set the right balance and convey the appropriate message that benefits all market interests. A plethora of reported new inducements keep coming to the fore.

Apparently the EU has a carrot for the new Greek leaders, further reductions in interest rates and extended repayment periods for bailout loans, as well as EU money to spur investments in Greek public works programs through the EIB. The BoE has a “funding for lending” scheme where Governor King offers banks unprecedented access to central bank funds if they keep lending. Yesterday’s worse than expected US claims numbers against a backdrop of soft May inflation data is raising expectations that the Fed could step up to the plate, similar to its colleagues, and introduce further monetary stimulus. A two day FOMC meeting beings early next week.

A sense of calm before such a major event risk is an eerie feeling. This is where the second guessing begins. Do I have the right position? Have I taken enough risk off? Where will this market open if they win or they lose? Do I have enough collateral? The only thing that is certain, is that this market will move and that the longer one waits to adjust their position, liquidity becomes a premium. By days end do not be surprised to witness another exaggerated short squeeze as investors pay away to execute their final trades.

An interesting scenario is occurring between the technicals and the retail sector. For the first time this week, the technicals are on the verge of encouraging further market gains for the single unit. That’s to be expected after yesterday’s price risk movement on the back of a rumored Greek pro-austerity win and Spain not needing quite so much of a bailout. The retail sector are firmly in the short EUR camp, adding new shorts at these elevated prices. The techies will argue that a close above yesterday’s 21-DMA is encouraging for further price gains. The hourly’s are overbought, but, expect the market to remain better buyers on dips while the retailers seem to be settling themselves in for the longer haul.

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Event Risk Requires a Higher EUR

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