ORIGINAL POST: 4:15 AM
Whether driven by fundamental constitutional considerations or a keen awareness of the implications for their pensions, the German Constitutional Court granted the German government conditional approval to throw good money after bad. How conditional?
Germany’s ESM share will initially be capped at EUR 190 billion. As Germany is the only ESM participant with any meaningful extra cash laying around, this action turns Draghi’s bazooka into more of a pellet gun. It limits the ESM’s “unlimited purchases” of sovereign bonds. And, it waters down Draghi’s “whatever it takes” pledge to “whatever we can dig out from behind the sofa cushions.”
The markets immediately ramped on the news, but I suspect it’s only a matter of time before less bullish implications fully sink in.
The dollar sank slightly beyond our immediate target of 79.859, reaching 79.78 at the low so far. The next lower level of support is a .786 at 79.30 – 79.43.
The EURUSD tagged 1.2905, the 1.272 of the smaller of our two harmonic patterns.
There is substantial resistance at 1.2938, and then 1.3046.
More later this morning, including implications for stocks going into the FOMC announcements this afternoon.
UPDATE: 10:45 AM
The GCC’s decision practically guarantees more legal wrangling down the road. Thus, the ESM’s efficacy will most certainly be procedurally hampered. But, the larger issue is its size/composition.
As currently laid out, the fund will amount to EUR 700 bn. Consider, however, who’s putting up the lucre and when it arrives.
As Mish reported in June, the EUR 700 bn is funded in 5 annual payments. For 2012, there should be EUR 140 bn with which to beat back the bond vigilantes. However, several of the supposed contributors on the list are also likely contributees.
How much can we expect from the likes of Ireland, Greece, Portugal and Spain? Subtract their EUR 25 bn 2012 share, and the ESM is left with EUR 115 bn. How long will that last, given that Spain, itself, is estimated to require upwards of EUR 300 bn?
Another fun fact: according to recent polls, 54% of Germans are none too happy about forking over hard-earned euros to support their spendthrift neighbors. Angela Merkel, who’s tied her political career to the preservation of the euro, is up for election next year.
Her party, the Christian Democrats, is already in the cross hairs, having lost control of Germany’s most populous state — North Rhine-Westphalia — to the Social Democrats in May. How well can she defend the ESM/ESFS’s actions when she’s watching from the sidelines?
More in a few.
UPDATE: 11:15 AM
Can’t escape the irony of the Libyan embassy attack, juxtaposed against the iPhone 5 announcement. While the risk of war in MENA escalates further (finger pointing at Gadhafi and Al Qaeda, there must be an Iranian connection) the financial world will celebrate the introduction of another shiny new toy. I wonder which will get more air time…
UPDATE: 11:30
So far, the market is reacting as we discussed earlier: not exactly ecstatic with the GCC news. SPX made it as high as 1439.15 before beginning a slow fizzle to almost breakeven. It’s currently up 4 and change.
While waiting for the red-hatted ones to make their appearance last night, I had time to do a total reset on SPX. Every month or so, I erase all patterns on my charts and start with a fresh slate — just to see if I come up with the same conclusions.
Bear with me while I work through some fascinating long-term charts that have much to say about the market’s immediate future.
continued…
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