Risk markets, particularly the S&P 500, have broken higher and the uptrend which began in June continues. It seems that markets are pricing in additional quantitative easing, which major central banks have recently made clear is coming.
These solutions, however, are unsustainable and European governments will need to take action soon towards fiscal and political union — perhaps investors will have patience up until the German Constitutional Court’s decision on Sept. 12. In this case and for now, the trend remains higher and short-term bets to the upside can be made. Furthermore, the court approving the bailout funds could extend the rally as hopes intensify for the next logical step to take place, leveraging the bailout funds (banking license) to be better able to shoulder the weights of a Spanish and/or Italian bailout.
However, the environment has become more fast-paced with Spanish and Italian bond yields still at relatively high levels — uptrends for both continue. Any complications resulting from the courts decision on the bailout funds, such as the decision that any leveraging of the funds would finally become grounds for a referendum in Germany, may give bears ammunition to go on the offensive. It’s interesting to note that now the majority of the German population doesn’t believe the Euro is good for Germany.
Overall, the macro environment remains tilted to the downside as the fate of the global recovery now rests in the hands of the German Supreme Court, and is another example of how globalization has its dark side. Technical analysis says that the trend continues higher, but I’d remain cautious and devote little capital to further profits from an upward move in risk assets.