Morning Folks,
Today’s sunny start wasn’t confined to the big outdoors; the papers were full of it, and not just the Chelsea Echo. So, with Europe closed, and equity markets looking as dull as a James Blunt CD, I decided to have a scratch below the surface of this morning’s headlines.

Bank of England says worst of credit crunch is over
The Bank’s Financial Stability Report, written by John Gieve (yeah, the one who presided over the Northern Cock-up) reckons we’ve seen the worst of the credit crunch and that there are even bargains out there for long-term investors. He says that the sort of losses being banded around are unlikely to happen as they’re based on the panicky prices being made in order to avoid getting hit with stock. These prices suggest a level of defaults in AAA rated loans that beggar belief. Although not as sound as government bonds, a AAA rating implies the highest probability of the loan being repaid in full. So the likelihood of a lot of these bonds defaulting ought to be less than current market prices suggest. Other rose-tinted comments that set the Bank Of England apart from its international counterparts included this one:

“While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months,” he said. “Not if house prices drop 10%,” I thought.

The report isn’t too worried about a housing crisis, saying that there’s still plenty of equity in homes. Now, I haven’t the time or desire to read the full 70-odd page report, and I’m nowhere near as bright as these guys. But I’m not rushing through the streets in a Ra-ra skirt proclaiming the brave new beginning just yet. Nor am I stepping in to buy back my short in bank shares.

Even if stability returns to the money markets, and houses do still have positive equity, I don’t see this solving the personal debt problem. Banks aren’t going to be keen on financing higher mortgages payments, massively higher petrol prices, higher food prices and higher energy prices. Oh, and don’t forget the newly discovered stealthy motoring tax on car engines (check that one out before buying your next 4X4).

US avoids recession
Yesterday’s first quarter GDP number for the US was better than expected at 0.6%, and the 1% rise in personal consumption was also higher than expected. But get this, the way the numbers work is that GDP was boosted by things called inventories. What this means is that Q1 growth was higher than expected because firms produced more than they could sell. So the US began the second quarter with millions of spare pizza-burgers, thousands of spare laptops and hundreds of plastic body parts that needed to be sold before there was any point in opening the factory doors. Stripping out the inventory figure, sales for the quarter were negative, suggesting a lack of underlying demand. And let’s open the lid on that 1% rise in personal consumption. Consumption of goods (like burgers, i-pods and David Beckham nighties) actually fell. The figure was boosted by the positive effect of services, whether it was a relaxing back massage, giving Pammy Anderson another boob job or writing new CVs for investment bankers.

Fed presses ‘pause’ on interest rate cuts
So, the Fed cut rates by 0.25%, no surprise there. It also implied a pause in cutting rates, as expected. Except it wasn’t quite what the market wanted. I’ve said before that some highly-paid versions of Cracker like to ‘get inside’ the words of the statement to find their inner-meaning. And what they found was the statement wasn’t as emphatic as they’d wanted. I’ve also said before that traders like it easy; either rates are going up, they’re going down or they’ve stopped going up or down. This statement is rightly more balanced than that, keeping the option of moving interest rates if necessary. No central bank worth its weight in chips is going to call an end to interest rate moves, they’re not Mystic Megs.

The statement changed a few ‘key’ phrases from recent statements, when it was particularly concerned about the damaging effects of the credit crunch. Explicit references to “downside risks” and “acting in a timely manner” were dropped, but warnings about risks to growth from tight credit conditions and contraction in the housing market remained. It seems traders wanted a rose-tinted statement similar to the one provided by the Bank of England, but Beardy Ben Bernanke told them to get real and smell the coffee.

Traders didn’t know what to make of the ‘let’s be honest, we’re not sure’ statement from the Fed. The Dow immediately rallied to 13000, the highest level since 4th January. Half an hour later the market collapsed to end the session 200 points lower. Similarly, the Euro gained 100 pips against the Dollar, but lost all of that and more this morning. I gave up on last night’s markets; they presented lots of opportunities for the brave. I squeaked and went off for a cheese supper.

It was interesting to see the trade reports at paddypowertrader for yesterday; there were lots of bets, but the stakes were much lower than usual. It looked like plenty of traders wanted to get involved, but sensibly didn’t want to risk much capital on trades they weren’t too convinced about.

So that was three cases where the stories weren’t really as cheery as the headlines. Here’s one where the storm clouds are gathering and the headline doesn’t try to hide it:

Eurozone economic confidence slips rapidly
Yesterday saw the European Commission’s monthly economic confidence index fall to its lowest level since August 2005. This, on top of Monday’s report (where the Commission revised down its growth forecasts for the EU) put a cut in interest rates back on the agenda. But the same stumbling block remains; even though Eurozone inflation has dropped to 3.3%, and is forecast to fall further; it’s still in the penthouse suite with the 2% target down on the ground floor. The gap is too high for the European Central Bank to cut rates and maintain its street cred.

Over To The Markets
So, where does this leave the currency markets? I’m stating the blindin obvious here, but we can’t just sell currencies like we do other investments. When we sell one currency we have to buy another one against it. This makes it tricky if you think that growth is likely to slow in Europe, the US, UK and Japan.

But traders can always scent blood, and the wounded prey is the Euro; the logic might just be, “coz it’s your turn.” The Euro, benefiting from the ECB’s anti-inflation rhetoric, has had a stunning few months while those around it suffered as they tried to appease bankers, politicians and voters. But just for now the playground bullies have tired of the easy victims; they fancy a new challenge-the Euro. Choosing the other side of the trade is a matter of risk; if you have a couple of peanuts between your legs, the EURGBP is the less volatile option. But if you’re sporting a proud set of bull’s b*llocks then there’s more mileage in EURUSD.

I’ll be honest here, I’ve been watching, and trading the Euro a lot recently. But the extent of the recent collapse made Amy Winehouse look stable. Just over a week ago the EURUSD rate was $1.60; this afternoon’s trade has put the rate below $1.55 support, and to me looks oversold on a short-term basis. The Relative Strength Indicator (a measure of whether a trade has been pushed too far in one direction) is flashing up a warning that the price has moved too far in a short space of time.

I’m feeling bearish on the Euro, but I’d like to see a rally first, just to see how far traders are willing to push it. Ideally, I’d like to see a test of $1.5730 ish. This is roughly the level of the 21-day moving average and it would also see a test of resistance at the up-trend line.

But with both the 10 and 21-day moving averages turning down, my alternative/ brave/ daft option is to sell the EURUSD if it fails to break above $1.55. If, and it’s a big IF, I do that I’ll do it in half my normal bet size and place a tight stop above the $1.55 level.

Happy Hunting