Archived IMT (2010.05.14)

FROM STRESS TESTS TO RATING STRESS: Exactly One year after the major US banking institutions passed the stress tests on their debt paying ability with flying colors, they are no facing investigatory stress by the SEC over their handling of derivative sales (Goldman Sachs, Morgan Stanley & BoNY) and this week the preliminary probe by the NY Attorney General that into whether banks have misled credit rating agencies in order to secure high ratings for derivatives (MBS CDOs). And just when the US economy was beginning to show its MACRO superiority relative to the Eurozone in terms of GDP growth, recovering employment, rebounding consumer demand and stabilizing business investment, US financial shares are now facing a new source of risk, which could exasperate a rocky US equity market in the process of recovering from so-called trading errors. We warned on April 19 in this piece http://bit.ly/aXo4zn that US equities (S&P500 and Dow-30) had failed to rally beyond 2 important technical barriers; their 200-week moving average and the 61.8% retracement of their decline from the 2007 record highs to their 2009 lows. With the danger of the Eurozone sovereign crisis creeping into European banks and the threat of regulatory/legal action on US banks looming, investors are given more reasons to exit risk currencies to the favour of the USD and JPY. SELLING THE BOUNCE in the euro pair has become a favourite past-time in FX trading desks, while the sobering reality from the Bank of England has quashed all post-Tory/LibDem coalition rally. The confidence of our January forecast for a $1.30 EURUSD target in Q2 may now be matched by a our prediction for $1.17 before end of Q3.