The Swiss Ceiling
The market was slammed again on Friday. Volume was light, due to the holiday, but the indices slipped by over 2%. Once again financials led the charge lower and the big banks like JPM, WFC, GS and C were down nearly 5% while BAC lost 8.3%. And the worst of the decline is not over.
The FHFA sent lawsuits to 17 banks. And the amount that was sought is in the billions of dollars. But the fear on the street is that if banks pay one settlement for a fraudulent mortgage, hundreds more cases will follow. And with $5 trillion in questionable loans, the banks are on the hook for a large sum of cash.
As anyone who has ever been involved in a legal case knows, this process takes time. In fact, it could be years before a big bank pays even one dollar, and that's if a settlement is reached.
Aside from the banks, the euro zone was in panic this morning. First the Swiss, in a brave maneuver, put a price floor under the Franc. Also, UBS's newest report starts with, "The euro should not exist."
The Swiss Bank intervened in the forex market to weaken the Franc. The National Bank claimed that it will no longer tolerate such a strong currency, that they believe to be extremely overvalued. And they pledged a sustained price above 1.20 to euros. The Franc immediately fell 8.5% and rests comfortably. This was an extraordinary move, also unexpected, and goes to show the lengths at which governments are willing to go to in order to support their county's best interest.
The Franc news was not the only negative story from Europe this weekend. A new UBS report sums up investor's worst fears - that the euro should not exist. The debate over the euro is tricky because many investors and politicians understand the euro is flawed, but the cost of disbandment is greater than the cost of keeping the current system intact.
More importantly, the euro zone does not need anymore negative news. The UBS report was the more recent item in a list of negative items that includes a 5% sell-off for European indices, a speech on a potential banking crisis given by CEO Josef Ackermann of Deutsche Bank and Angela Merkel threatened to halt Greece payments this month.
Despite the bearish headlines, and a projected 2% loss at the open for U.S. exchanges, Asian and European indices are holding up today. The Asian indices were mixed last night, Japan was down, but most other indices - led by India - were higher. Today European indices trade mostly flat, but are rising. France is the biggest loser in Europe and the biggest gains are obviously from the Swiss exchanges which benefited from a lower currency valuation.
The bulls have a lot going against them today. And buyers will have a difficult time holding 1175 amid the bearish tone in Europe. A break below 1175, until it's regained, targets 1115. I view 1175 as an important level to hold, and the bulls need to get back over that level soon, or the fall lower could get a lot worse.
