The Euro is now diving into the low 1.23 range, which strengthens the US Dollar and is bearish for the S&P 500. The declining Euro reveals the uncertainty and even now fear in the global markets. Simply put, there is an ongoing EU Viability Crisis, which then manifests as a Euro Value Crisis.
First there was the Greece fiscal meltdown and impending meltdowns of Portugal, Spain, Ireland and perhaps later Italy. This resulted in both an EU liquidity and solvency crisis. The EU, ECB, IMF Bailout of a week ago intervened on the liquidity crisis but not the solvency crisis. The solvency problem can only be resolved by political will through very tough austerity measures in the affected countries. The austerity measures will take several years to correct the problem and will likely keep those countries in or near a recession. The uncertainty of whether these countries will continue implementation of the austerity measures next year 2011, 2012, and further out is being questioned by the markets.
I don't know how the markets will calm down. So far, USA and Global economic data is positive. If the EU implodes this would undoubtedly negatively impact the global economic recovery, including the USA. Frankly, I think the USA & stronger European countries are and will be forced to continuing intervening to save the EU. Whether that is ultimately a good idea is questionable but I think inevitable at any cost.
Below are daily charts for the Euro/US Dollar, US Dollar Index, and S&P 500 with brief commentary. The Euro is descending, the US Dollar is ascending, and the S&P 500 is in limbo with an uncertain trend.
Euro: This Is What a Vote of No Confidence Looks Like
The yellow horizontal line is the Euro at 1.27507, the Friday, May 7 close before the EU announced the bailout on early Monday morning, May 10. The Euro has been below henceforth and is in full bear market mode, closing at 1.23147 on Friday, May 14.
US Dollar Index: This Is What a Safe Haven Looks Like
The yellow horizontal line is the USD at 84.59, the Friday, May 7 close before the EU announced the bailout on early Monday morning, May 10. The USD pulled back some that Monday, then went up Tuesday through Friday. USD is in full bull market mode, closing at 86.23 on Friday, May 14.
S&P 500: In Limbo
The yellow horizontal line is the S&P 500 at 1110.88, the Friday, May 7 close before the EU announced the bailout on early Monday morning, May 10. SPX rallied mightily on Monday, May 10 but gave a considerable amount back on Thursday and Friday, May 13 and 14 to close at 1135.68 for the week. SPX is below the 25, 50, and 100 day simple moving averages, has been below the 50d sma since Wednesday, May 5, and has been testing the 100d sma since Thursday, May 6. Even the critical support and benchmark price of 1150 has been broken through to the downside.
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