In an up and down week, the S&P500 managed to lose another 1.2% last week. Volume jumped again, which means that there was some conviction behind this selling. Volatility also jumped notably, with the VIX index closing above 20. This too suggests that investors and traders were treating the sell off more seriously than they typically did over the last three years. Finally, US Treasury rates dropped significantly. The implication was that as investors exited their equity positions, they didn’t just sit in cash, but ran for cover by loading up on the most deep and liquid safe-haven investment in the world, US Treasury bills and notes.
The technical picture got a little more bearish last week. On the daily charts, the S&P500 has failed to bounce back up to meet, much less exceed, the old highs set in late December 2o14. Instead, the S&P seems to be forming a larger topping pattern where the entire bounce from the mid-October surge is now slowly reversing itself. Also of note, when the late December highs were made, almost every momentum and breadth indicator did not confirm the all-time price highs. Instead, these associated indicators almost universally diverged bearishly. Does this guarantee a big drop around the corner? Not at all. But it is something to take note of.
In economic news, the results were mostly disappointing. Retail sales for example, both headline and excluding autos, missed very badly. Initial jobless claims came in much worse (ie. higher) than expected. The Philly Fed Survey utterly collapsed. On the bright side, the Empire State manufacturing survey beat expectations and consumers—shockingly, given the dismal retail sales results—claimed they were more confident than experts had originally expected.
For the first time in a while, a couple of upcoming one-off events could severely impact the world’s financial markets. First, on this Thursday, the European Central Bank is scheduled to announce a concrete program in which it will print (electronically) euros to buy government bonds. In other words, over three years after Mario Draghi assert that the ECB would do “whatever it takes” to save the eurozone, the ECB will finally be put to the test and announce a QE program of its own. The risk is that it may not do enough. For now, the world’s investors are expecting at least 500 billion in euros to be put to work, but the risk is that this may not be enough to satisfy investors. Also, the ECB may not do all the bond buying itself, but instead, allow its member national central banks to do the bulk of the bond buying—but only if certain conditions are met. The ECB is, and has always been, restricted by Germany which does not want to allow the ECB to print euros to rescue irresponsible member states. On Thursday, the world will b e able to judge if the ECB’s “whatever it takes” words will be matched by its actual deeds.
Second, on the following Sunday, the nation of Greece is set to elect a new government, a government that has pledged to re-negotiate the $200 billion in loans that Greece has taken on to pay its bills over the last five years. And now that Greece has finally achieved a primary budget surplus (it’s breaking even before taking into account its debt service), Greece can actually make good on its threat to default. And since Germany has warned that no prior debts will be re-negotiated, a major confrontation will be established. And the worst case scenario in this confrontation is that Greece exits from the eurozone and sets a precedent for all the other overly indebted member states to follow.
So this upcoming week will be very interesting, especially since despite the recent sell-off, both US equities and corporate investment grade debt markets have hardly suffered any meaningful damage. Will the events of the upcoming week change all that?