Trader Gregory Rowe, left, and specialist Peter Giacchi work on the floor of the New York Stock Exchange

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.

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.

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

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.

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.

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.

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.

Spanish Government, Euro news, Eurozone, Spanish 10 years bond

According to the latest reports from Tradeweb, the Spanish ten year yields went up by 23.4 basis points on the day.

This increase followed a demotion of Spain’s credit rating by three-notch. Moody’s took the rating within one notch of scrap status.

The increase in Spanish yields has been attributed to the approval of a bailout plan of about 100 billion by the Euro zone ministers at the weekend. The bailout will help in rescuing the country’s financial institutions.

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.

oil prices, global oil crisis, oil prices updates, oil prices news, oil production

Market analysts are pessimistic about the possibility of improvement in the oil market. Saudi and other key members of OPEC have been forced to become more concerned about the oil market especially due to the looming traditional summertime rush in fuel demand and the threatening date for the imposition of international sanctions on Iranian oil trade.

Giving his opening speech to the OPEC group during the last summit in Vienna, the group’s secretary general, Abdalla Salem el-Badri, noted that the long-term nature of the oil industry and the importance of clarity and certainty, for oil and energy, call for the following words Stability, stability, stability.

According to report published by the international energy agency on Wednesday, twelve members of the OPEC group provided 31.9 million barrels of oil a day in May, which is almost 35% of international oil supplies. The energy agency also noted that OPEC’s oil production was pushed up by Iraqi and Saudi production. The group’s current output has risen by about 2.8 million barrels a day since May last year. By December last year, OPEC’s oil production had risen by about 1.4 million barrels a day.  This output exceeds greatly what the group had predicted, and members wish to garner greater revenue by increasing the prices.

Even though oil prices have dropped by about 22% since the start of May, historical standards have forced them to remain high causing them to drag the economic recovery in the US and Europe. In a bid to avoid slowing the global economic recovery which may have a permanent damaging effect on oil demand, Saudi Arabia has continuously insisted on producing 10 million barrels a day.

Oil analysts such as Fadel Gheit of Oppenheimer and Company argue that even though there has been a drop in oil prices for the last three months, oil prices are still inflated with the international supply and demand view refusing to offer support to current prices.

Although the cost of OPEC’s basket of crude oil mix has remained at a 16-month low, this year it has set a record by going up to $114.28 per barrel.  Oil consumers in Europe appear to be hard-pressed following the weakening of the Euro and oil being priced in dollars.

Some analysts also argue that prices are likely to remain at or close to current levels. They attribute this development to the increasing consumption of gasoline in America, which has gone up past 9 million tubs a day, the first increase to be witnessed since August.

Oil prices have been one of the most important variables for the economic policy makers. Inflated prices act the same way as tax increases, consuming finances from consumers and draining it off from consuming countries. Gheit approximates that the Middle East chaos has increased regular oil prices by almost 25 dollars a barrel, or more importantly 700 million dollars a day, an astounding figure of over $380 billion during the past 18 months.

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%.