Market Comment By Patersons Andrew Quinn

 

Below is from Patersons’ excellent strategist Andrew Quinn. It is his view on the market:

We need to see support for treaty change out of this EU summit. This will clear the way for improved bailout and supportive measures. The EU needs to reassure the markets that they are not going to allow a Bond market collapse in the EU, and will stop mucking about with convoluted negotiations and complicated packages.

EU treaty change – (sets a path for debt consolidation after March 2012).

Debt consolidation/centralisation – Bond purchases (QE)/Cross EU Bonds.

IMF back stop – Leveraged facility up to a trillion.

Very simple.

If we do not get treaty support and some kind of improved back stop to the debt situation out of this summit there is a real risk S&P will downgrade both EU banks and sovereigns, and EU Bond yields will rise again.

 

We need a positive catalyst to break upside technical resistance both in the US and Australia.

Given the US indices and the XAO are trading up against resistance, and

 

 

Therefore, if the EU disappoints we will likely move from Neutral/Bullish to Neutral/Bearish, looking for the market to trade back towards the technical base, cover the gaps and then we would look for a turn into the FOMC meeting on the 14 December (although this is pretty tight timing), and would depend on whether the ECB can consolidate periphery Bonds yet again, and how fast S&P act. 　

So keep your finger on the trigger. It’s like the stare-down at the O.K Corral.　　

Key issues:

EU summit on 8/9 December.

 

Merkel is pushing for treaty change by March 2012, after which if successful, expect to see greater involvement in the periphery Bond market by the ECB and improved supportive measures by the IMF, unless a crisis occurs earlier. The primary risk for the market is periphery countries talking against EU treaty change. Failure to comply would suggest a greater probability of a breakup of the EU, and send stocks lower.

ECB meeting 8 Dec. – Set to concentrate on freeing up very tight EU liquidity in the banking system. Probably with reduced constrains on collateral requirements and longer term loans to banks. The fixed ECB rate is 1.25%. They are likely to cut rates.

– Set to concentrate on freeing up very tight EU liquidity in the banking system. Probably with reduced constrains on collateral requirements and longer term loans to banks. The fixed ECB rate is 1.25%. They are likely to cut rates.

CHINA CPI – 9 Dec. Nov. – Consensus: 4.5% – We need the CPI to come in inline or below to provide additional scope for China to relax monetary policy.

– We need the CPI to come in inline or below to provide additional scope for China to relax monetary policy.

FOMC: 14 Dec. – Potential for QE3 – targeted at mortgage asset buying. The FOMC knows there is going to be a lot of Bond issuance from both sovereigns and banks in the first half of 2012. While partly participation influenced, the US Unemployment rate dropped to 8.6% in November, after payrolls climbed 120K. Property prices remain under pressure, the FOMC should be very inclined to try and give US property a kick on into the New Year. With manufacturing looking better, and with employment conditions improving slightly, if property could flick up it is going to give the market a convincing picture of the US economy being on　 the improve and that would help global Bond market demand in 2012 and place some confidence back into the game.　

– Potential for QE3 – targeted at mortgage asset buying. The FOMC knows there is going to be a lot of Bond issuance from both sovereigns and banks in the first half of 2012. While partly participation influenced, the US Unemployment rate dropped to 8.6% in November, after payrolls climbed 120K. Property prices remain under pressure, the FOMC should be very inclined to try and give US property a kick on into the New Year. With manufacturing looking better, and with employment conditions improving slightly, if property could flick up it is going to give the market a convincing picture of the US economy being on　 the improve and that would help global Bond market demand in 2012 and place some confidence back into the game.