World shares dropped following concerns that the two-day meeting of EU leaders, expected this week, will have very little impact on the debt crisis.

The late trading in the afternoon in New York appeared to weaken after the Standard and Poor’s 500 indicator dropped by 1.71 percent. The Dow Jones indicator of the industrial average declined by 1.27 percent, while Nasdaq Composite indicator weakened by 2.00 percent.

According to the latest reports from Bloomberg News, the European market, the Stoxx 600 indicator closed by indicating a loss of about 1.5 percent on a couple of the previous trading sessions. That wiped out its last gain for the year.

Among the greatest issues of concern about European market outlook were an additional decline in oils prices plus the latest action of the bond yields especially those on US treasuries. Although these treasuries were deemed a safe-haven, they have maintained a drop while the ones on Spain and Italy indicate a continuous increase.

According to a recent report from Bloomberg, the 10-year US note yield dropped 7 basis points to about 1.61 percent. This forced the bonds to record the greatest intraday decline since June 15^th.

Mandy Xu, a strategist in equity derivatives at Credit Suisse, NYC told the Reuters that the dropping oil prices plus the declining bond yields show global growth, while increased autonomous credit spreads along with a strong US dollar imply that the current European disaster won’t be solved anytime soon.

Spain’s two-year bond yields increased 39 basis points to around 4.83 percent. This largely attributed to the request issued by the state to the EU for more aid. It had requested for more than 100 billion euros for its banks.

Germany’s Chancellor, Angela Merkel, still insists that some of the problems facing the Euro Zone can be solved through Euro Zone bonds.

Merkel was reported by Bloomberg as saying that it is not a brave prediction to claim that most people in Brussels will be focusing on Germany once again. She added that she expects the forth coming meeting to focus more on ideas for a joint liability and pay less attention to improved mistakes and structural measures.

Today, the euro showed a weakening trend after it dropped by 0.7 percent against the US dollar. The news that the Greek’s finance minister had resigned a few days after taking over the job did not have any positive impact on the currency. The euro didn’t fare so well today either, weakening 0.7 per cent to US$1.2483.

Accusing Merkel of misleading Europe, billionaire George Soros told Bloomberg that the EU officials have only three days to solve their differences.

Credible sources also told Reuters that the worsening situations in Europe are evidently taking its toll. They added that the credit Suisse is expected to layoff some of its senior officials in its European investment banking department by a third. This is mainly due to the stiffer regulations and weakening market.

Another source said that the European investment banking business is expected to layoff 60 directors and managing directors.

As generally anticipated the FED on Wednesday expanded its operation twist, which would have expired by end of June. The twist is now expected to end at the end of the year.  In principle, that development is expected to trigger the sale of near-term securities and purchase of long-term bonds.  Alan Ruskin, the head of G10 FX strategy at Deutsche Bank, summarizes a couple of implications of the Twist on FX, Gold and rates.

The long-term rates for the Twist are being associated with a sturdier USD against other major currencies. It is also being associated with lower commodity prices especially for the oil. The twist is also expected to cause decline in bond, equity, FX volatility. It is somewhat difficult to clarify the causality in this instance, since crisis in Europe rather than the Twist could have served as the main driver of the dollar, while the situation in China and the dollar have had a major influence on the commodity prices.

The EUR/USD pair has been tracking the ECB’s balance sheet more closely that the Federal Reserve’s balance sheet in line with the significance of the situation in Europe. The pair has been showing a significant weakness which is related to the actions of the ECB’s balance sheet. This weakness began from the last LTRO, perhaps since the spikes of LTRO liquidity were abnormally large. Nevertheless, there are threats that the current RUT fault has priced in considerable ECB balance sheet growth.

Even though Twist is associated with considerably high price increase estimations such as QE1 and QE2, nominal long-term yields have dropped. This comes as a result of a drop in real yield, more than what was predicted. Consequently, gold has declined, which signifies little fear over larger price increase implications of unorthodox operations- again due to lack of expansion of the Fed’s balance sheet.

The operation Twist is also being associated with lower long-end rates. The flat yield curve that is relative to the strength of the dollar is also being attributed to the Twist.

“THE MARKET(S)” a.k.a. “RISK” SNAPSHOT – 60 Minute Closes

SPX 500 – Daily Bars

This chart has been updated since last week. However, there are no changes to the text. Apparently, the correction (rally) is complete but the time is yet.  Somewhat over 50 percent of the turn down was retraced in more than a week’s time. The turn down from the last high in April consumed 43 days. I’ll maneuver deeper into these statistics but when you take a look at remedial rallies occurring after 5wave drops from essential tops (1987 and 2007) you will notice that these rallies are consuming 1/3-1/2 of the duration that the drop took. Precisely, it is anticipated that the rally from the drop will take approximately 14 to 21 days. Estimated from the low of 6/4, topping dates on 6/22 and 7/3 become apparent.

SPY ETF – Daily Candles

This has been updated from the last two weeks plus last week. It is now clear that the last leg of remedial rally that started at a 6/4 low is already underway and it is headed towards 137.55. There are a couple of gaps that you need to keep watching: 135.53, 136.99, and 138.99. Equally possible extension levels include1368.93 for the S&P indicator and 12918.65 for the DOW indicator.

AUDUSD – Daily

Right now, the focus for AUD/USD pair remains around 10225/10240. However, the advancement from 9849 has matured (5 waves). A pullback might test the 10050 level in wave 4 of C prior to the attack on the average 10200s later on in the week (have a look at the upcoming chart for near term wave count).

AUDUSD – 240 Minute Bars

The euro’s aloft shift on the results of elections in Greece was rather fleeting, to say the least. It is time to focus the attention elsewhere for investment.

Immediately after the confirmation of the triumph of pro-rescue parties in the weekend’s Greek poll, the Euro experienced a significant upward drift. However, before people could even make noise for the New Democracy Party it just went…pfffft.

A lot of market analysts and financial experts have given their views on the latest development in Greece. For instance, the head of the upcoming Asia rates strategy, at the Bank of America Merrill Lynch, Claudio Piron, offered a couple of reasons why this is happening.

He said that they had a clear focus on the event, but once it has transpired they will shift their attention to the expected Spanish Bill auction on Tuesday and the country’s bond auction on Thursday. They also expect to get Spain’s banking audit. The Euro group is also expected to meet on Thursday. The G7 leader’s meeting will be happening on Monday while that of the Fed will be happening on Wednesday. He added that there are different kinds of risks that have begun to reassert their focus for the trade.

Given the vagueness surrounding most of these events, Piron noted that his firm is focusing more on other currencies, and advising investors to sell the Australian dollar against the New Zealand dollar.

He however admits that the two currencies are risk-on currencies. Piron concluded by noting that the Reserve Bank is expected to release minutes from the forthcoming Monetary Policy Committee summit.

(Repeats to new subscribers without any alterations to the copy)

Reports from Reuters claim that there was a fall in financial assets in Spain and Italy on Monday. However, it was noted that the 10-year Spanish public bond yields rose significantly, hitting the highest point in Euro-era of 7 percent. This rise was largely attributed to the country’s consistent concern to its financial and banking problems.

Fiscal markets opened with a high following the triumph of pro-rescue parties in Greece, which won with a simple majority in the elections that were held over the weekend. However, the release proved brief especially after the Euro dropped against the US dollar.

One bond trader noted that the markets wish to fade the release rally, and Spain suddenly seems to be blowing out again.

The trader also added that Spain seems like it will remain under pressure until Thursday saying that it is still hard to determine what can stop the country’s yields moving further up.

Spanish bond yields rose by 22 basis points the day they increased by 7.14 percent. This seems to be the highest point in Euro’s lifetime. Greece, Portugal, and Ireland were strained to get international rescue immediately their 10-year yields surpassed 7%.

Italian bond yields went up with 15 basis points to hit 6.08 percent. According to Reuters, Spanish 10-year yields premium over Italy went up with 108 basis points, which is also a euro-era high.

Stock markets in Spain and Italy recorded an underperformance. Market indicator in Spain fell 0.9% while the Italian indicator fell by 1.2%.  FTSEurofirst upturned early increase and it had lastly dropped by 0.11 percent.

As Greece prepares to go for the next round of pools, this weekend, BAML’s credit plan group tackles three possible results of the polls on various asset classes. Although they may have concerns about all potential post-poll scenarios, it does not mean that they are going to cause an exit from the currency union, at least not in the near term. Some analysts argue that some of these results may cause the first market rally that may reinforce the euro. Their study focuses mainly on the short-term (four-week) market insinuation, and Spain and Italy will be dealing with a sovereign disaster over this period. But these concerns are expected to carry on.

The three scenarios are:

• Base case (high likelihood): poll result gives Greece a chance to structure a pro-EU government; restricted European strategy response;
• Bull case (low likelihood): poll result implies that Greece doesn’t create a pro- EU government; considerable ECB and European strategy response.
• Bear case (low to average likelihood): poll result implies that Greece does not succeed to create a pro-EU government; restricted ECB/European strategy response.

The following are details of one-month asset price response for credit, interest rates, forex and commodities.

Background on the polls

For a fresh government to survive, it has to obtain at least 151 parliamentary sees. The main difference between Syriza and New Democracy still remains within margin of error mainly attributed to opinion polls. The party that wins majority votes gets a bonus of about 250 seats. The remaining ones are then shared out proportionally.

One of the ECB’s policy makers Jens Weidmann said that the bond between state governments and their financial institutions ought to be broken with a banking merger. He was speaking to members of the press in Italy on Friday.  

Weidmann also added that this is not something that can be solved immediately especially since it involves numerous legal changes some that are similar to those of financial merger.

Weidmann, who also serves as the chairman of Germany’s Bundesbank, noted that the agreed 100 billion euro bailout package was enough.

He also added that considering the current economic situation the bailout seems to have enough margin of safety.

Weidmann also noted that the failure of Greece to meet its debts would interrupt with the funding process.

Weidmann noted that such a situation would have serious consequences on the likelihood of remaining in the Euro.

Weidmann also commented on the current reforms being undertaken by Italy’s premiere Mario Monti saying that the prime minister had carried out significant reform measures.

He said that the only task that is remaining is to implement the reforms adding that the process might take long before it comes to fruition. Weidmann also noted that Italy looks promising.

When Weidmann was asked whether the ECB might lower interest rates below 1%, he said that the ECB would never commit itself before time.

He said monetary market unsteadiness came from political vagueness on implementing reform programs in Greece and on the fate of Euro zone in general.

He also noted that rate cut is not a solution to everything.

The Spanish ten year public bond yields went up to 7% on Thursday. This is the first time in the common currency history that the yield goes up to the level viewed by many markets as costly for any sovereign to borrow above long-term.

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With the current global economic situation, the Organization of petroleum exporting countries, which appears to be deeply split, met in Vienna to discuss the possibility of reducing production and increase prices for crude oil.

Saudi Arabia, which is the world’s largest oil producer and cartel member with the greatest leeway to tighten or open its taps, showed up in the summit promising not to reduce its production and hold the group’s line on quotas.  Other members of the OPEC including Venezuela and Iran wish to cut their production in order to improve oil prices.

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Reports from recent surveys indicate that U.S employers are planning to hire more workers in the third quarter.

Employment indicators for July and September went up to 11%, the highest in four years. The estimates were at 8% the previous year.

It is the first time since 2008, when employers appeared to be optimistic about employment in successive quarters in four parts of the country and different industries. The numbers are expected to ease suspicions that the labor market is undecided following reports from the Labor Department that indicated an increase in employment in May.

The CEO of Manpower, Jeff Joerres, said that they have been, slowly, moving away from this, adding that although it is nothing good, cooperation is needed to move up the hill.

Increase in jobs allows Americans to increase spending, which helps to boost the economy by 70%. However, some companies remain reluctant to recruit staff due to the tepid recovery, slowdown in Europe, and the US plans for taxes and medical care.

Joerres noted that companies can easily adjust, adding that in case of a heavy cloud on the horizon, the numbers will immediately slowdown.

Employment Cools

According to Bloomberg news review, the US economy helped in the creation of 69,000 jobs in May, the least expected number. The redundancy rate went up to 8.2% after holding above 8% for 40 months, which is the longest duration since World War II.

Manpower has also reported that 21% of over 18,000 companies that were surveyed said that they plan to add more staff in about three months. But 6% said that they are planning to reduce payrolls.

Entertainment and hospitality companies optimistic about job increase, while those situated in Midwest and South were more positive.

Manpower conducts such surveys quarterly and they have a margin fault for US information of 0.6%.