Ralph Shell @ 2:12 PM, Tuesday May 18 2010
Monday's late rally in US equities gave the appearance that we were set up for the Tuesday rally. Equities in Asia as well as Europe took the bait and moved higher, but after a higher opening, US equities retreated to unchanged. Part of the problem was the inability of the euro to participate in turnaround Tuesday. Despite welcoming incorporation of the new group from Tallinn Estonia, and a €8B handout to the Greeks to refinance some old debt, the euro has gotten little respect today.
With the euro futures open interest climbing to 303K contracts (futures only) today, we had felt there might be a short squeeze, but this is not the case, and the pair is beginning to act like a retest of the 1.2233 level might be in order.
Recently the USD has been a pillar of strength versus the euro as the world focuses upon the attempted resolution of the Greek crises. Lost for the moment, is the fact that the US has two of its own, Illinois and California on the cusp of insolvency. Total debt for the state of Illinois is now about $140B, or $25,000 per household. Illinois has a solvency problem. State legislators are having their phone service cut off, while others are receiving eviction notices because the state has not paid their rent. State suppliers of goods are refusing to deliver to the state unless they are paid first, and doctors providing medicaid services are waiting months to be paid. Unable to address the state's problems, the state legislature took a recess rather than find a solution.
The growth of the public sector and their benefits in the US is a problem and must be addressed or the US will be a future Greece. According to Chart Facts, the total number of employees in the Federal, State, and Local governments is now 22.6 million or 17% of the total US non-farm payroll. Further government compensation since 2005 grew on a y/y basis at 0.3% to 1.6% faster than the private sector. In Illinois there is $130B debt owed to the public employees retirement program. As the public sector grows, the private sector shrinks, the growth rate slows, and the tax revenues diminish.
Trading currency pair involves relative strength and weakness. Too much attention about tomorrow's problems will cause you to slip and fall over today's issues if you are not careful. So much for Turnaround Tuesday. Equities have turned lower, once more the USD is the safe haven, and Treasury yields lower, apparently in response to investors seeking safety. Many of these markets act like they are headed lower which will keep the dollar firm. The pound has been in a free fall for the entire month. With the RSI at 24, it is deeply oversold, but markets some times stay that way and take a lot of your money if you try to fade them. If not short best to remain on the sidelines.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.