Promises and Meetings, Meetings, Meetings

Last week’s big promises lead to this week’s big meetings

Markets rocketed higher late in the week as significant promises were made by European Central Bank chief Mario Draghi, German Chancellor Angela Merkel and French President Francoise Hollande. Now this week brings a flurry of meetings which will determine if these promises will be kept and how markets will react.

On My Wall Street Radar

After a week of crazy volatility, major U.S. stock indexes finished the week back at near term resistance levels.

The week started with notable declines on Monday, Tuesday and Wednesday which were a follow up to action late in the previous week. On a closing basis, the S&P 500 (NYSEARCA:SPY) declined 2.8% from Thursday, July 19th to Wednesday, July 25th. Then Thursday and Friday this week brought promises, promises and the S&P 500 (NYSEARCA:SPY) gained 3.6% over two days to close at 1385 on Friday, 9 points or .65% above the close on Thursday, July 19th when all the fireworks began.

chart courtesy of StockCharts.com

In the chart above we can see how the S&P 500 (NYSEARCA:SPY) remains in its sideways pattern with resistance at 1385 and support at 1320. Overall the configuration remains bullish with an upside target of 1550, however, current resistance levels need to be broken before that higher target can come into view. Bear market territory lies at the diagonal blue line angling up to approximately the 1320 level.

So on a technical basis, last week’s promises, promises have brought us to yet another significant turning point.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) climbed 2%, the S&P 500 (NYSEARCA:SPY) added 1.7%, the Nasdaq (NYSEARCA:QQQ) gained 1.1% and the Russell 2000 (NYSEARCA:IWM) added 0.6%.

The View From the Summit

Last week’s action was split in two, with Monday, Tuesday and Wednesday focused on trouble in Spain, poor earnings reports and weak economic news while Thursday and Friday saw a powerful rally fueled by promises, promises.

Positive fundamentals included a decline in weekly jobless claims, the GDP revision coming in weak at 1.5% but better than the expected 1.3% and a slight gain in University of Michigan Consumer Confidence but still the lowest reading in 2012.

Negative factors included a significant drop in June Pending Home sales New Home Sales, a decline in the Markit PMI and a flat durable goods report. The Richmond Federal Reserve manufacturing report took a huge tumble and Britain sank deeper into recession with its Q2 GDP coming in at -0.7%, its third quarterly decline in a row and just in time for the Olympics. Finally, seven Spanish regions asked the central government for help as Spanish bond yields continued to spike early in the week.

But then came Thursday and Friday when European Central Bank President Mario Draghi promised to do whatever it takes to save the Euro and he was backed up with a joint statement from Dr. Merkel and Mr. Hollande that they were on board to take all necessary steps to save Europe. Markets took them at their word and Spanish bond yields dropped sharply and global stock markets rallied hard.

First Promises, Now Meetings

So this week brings a flurry of high level meetings designed to deliver on last week’s promises.

1. The U.S. Federal Reserve meets on Tuesday and Wednesday and markets anxiously await its announcement on Wednesday at 2:15 pm Eastern time.

2. The European Central Bank meets on Thursday and Mario Draghi will hold a press conference following the meeting.

3. Mr. Draghi will meet German Bundesbank President Jens Weidmann to try to get Weidmann on board with Draghi’s latest promises. The Bundesbank has been strongly opposed to bond buying schemes and calls the strategy “problematic.” Draghi will meet with Weidmann before the central bank meeting in Frankfurt on Thursday.

4. U.S. Treasury Secretary Timothy Geithner meets with Mr. Draghi and German Finance Minister Wolfgang Schaeuble on July 30th in a day of jet setting diplomacy, meeting Schaeuble on a German island named Sylt and Draghi in Frankfurt that evening.

So why all the rush, rush, hurry, hurry, promises, promises, meetings, meetings?

The answer is clear and focuses firmly on the escalating problems in Spain. The country first needed a bailout for its banks, now for its regions and its becoming more than painfully obvious that the country will need a full fledged bailout if its borrowing costs aren’t quickly reduced and it can regain access to international credit markets. An inconvenient side show is Greece which is obviously coming up short again in its efforts to meet its deficit reduction goals and will either need more bailout money or will head to a likely exit from the Euro as early as September.

Reports indicate that Greece could run out of money as early as August 20th and the German Finance Minister has made it clear that there will be no more concessions. Spain is too big to save. A recent poll in Germany shows that a majority of the population thinks they would be better off leaving the Euro.

So now the European house is really on fire and the rescue workers are out in full force to try to get the raging blaze under control. This week’s round of meetings will be pivotal in determining if Spain and Europe can be saved.

In more mundane news, it will be a huge week for economic data points as we see personal income, personal spending, Case/Shiller home prices, Chicago PMI and consumer confidence, all on Tuesday. Wednesday opens with the ADP employment report, ISM, construction spending and the widely watched FOMC meeting. Thursday brings weekly jobless claims and factory orders, and Friday features the big gorillas, the monthly Non Farm Payrolls and unemployment reports.

It just doesn’t get any more exciting than this.

So how does it all add up? No one has a crystal ball but here are the main things to watch. On Wednesday it’s highly unlikely that Dr. Bernanke will unleash another round of bond buying as he needs to keep his powder dry in case Europe blows up on Thursday. Many analysts expect an extension of the low interest rate environment.

Thursday’s ECB meeting is a wild card. Will Mario Draghi be able to convince the Bundesbank and German Finance Minister Schaeuble to go along with his bond buying plan? Will he be able to convince them and the rest of the “northern tier” and ECB that this is truly within the bounds of the ECB mandate and the European Union treaty? If actions don’t follow promises, we can expect major fireworks in global markets and not of a celebratory nature.

Friday’s employment report, normally a huge event, is almost an afterthought as European leaders scramble to get in front of the runaway freight train that is Spain.

Bottom line: Europe has no means in place to put out this explosive fire except for the European Central Bank to start acting like the Federal Reserve and buy bonds. It’s problems are Bundesbank opposition, the European treaty and the fact that the ECB itself might be looking at a 30% haircut on its Greek bond portfolio. Should the ECB and national European banks take a hit on their Greek holdings, many analysts forecast that a subsequent recapitalization of central banks and the ECB itself might be required. That nightmarish event would certainly trigger another round of even more intense and dramatic promises and meetings.

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