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Part 2 of Weekly Market Movers Prior & Coming Week: A weekly market strategy overview for traders and investors in stocks, forex, commodities, both spot market and binary options

See Part 1 for prior week market movers and their lessons for the coming week. As for the coming week, here are the likely key market drivers and ramifications.

US Debt Ceiling Drama

With time running to both reach an agreement and draft the actual legislation needed before the August 2nd default deadline, progress or lack thereof is a potential major market driver. Unlike in prior weeks, news on the US debt ceiling fight and default threat should have everyone’s attention until some agreement is reached.

After last week’s talks broke down, US congressional leaders got a scolding from President Obama Saturday morning and have been working steadily since then. They hoped to be able to show enough progress by Sunday afternoon EST to avoid spooking Asian markets, which open Sunday evening EST.

The goal is to show real resolve and progress towards reducing the US deficit. If they can only manage a short term extension of the default deadline without that progress, then credit agencies could strip the US of its AAA ratings, which could scare markets and raise borrowing costs for both the US public and private sector.

As with the EU debt crisis, political considerations grossly complicate making a deal. Both sides seek concessions that would hit the other’s appeal with their core voters in the coming year’s elections. Democrats want the Republicans to concede new taxes; Republicans want the more leftist Democrats to cut social program spending in exchange for any debt ceiling increase.

While markets continue to believe the US is unlikely to default, what’s at stake now is retaining global market confidence that Washington can get serious about cutting its deficit. Failure to succeed on that front will hit both the USD and global risk appetite. Success would achieve the opposite. The USD could get an even stronger boost if markets realize just how problematic the latest EU Greek rescue really is.

Reaction To Latest EU Second Annual Greece Rescue Plan

As we noted here on Thursday when news first came out about the EU’s latest bailout, 3 problems were immediately apparent.

Private Sector No Longer Protected From Losses

Not only had the EU removed it’s implied guarantee against private sector losses from GIIPS bonds, the extent of haircuts actually inflicted remains unclear. That means Greek and other GIIPS bonds are now far riskier than previously thought.  Higher risk must bring at minimum higher borrowing costs for the GIIPS trying to access credit markets. If these costs are beyond what they can afford, or if the private sector shuns new GIIPS bond offerings, then other GIIPS will soon be at risk of default. Think about it: would YOU buy GIIPS sovereign debt without knowing just how big a loss you could take at some perhaps not so distant future date? Even if you would, at what additional yield compared to mere months before when you had an implied EU guarantee against loss?

Other GIIPS Rescues Now Cost More

They’ll all want at least the same if not better terms. Doubtless all noted that when faced with a Greek default and threat of a global banking and market crisis, the EU backed down. Will leaders of Ireland and Portugal, both elected with mandates to secure better aid deals from the EU, be able to accept any less? I later read an article by Felix Salmon in which he elaborated on this issue and why this latest plan raises the odds of more expensive rescues to come (as if they weren’t coming regardless of this or any other Greek aid plan).

Moral Hazard

By threatening default and another financial market collapse, Greece got the cash it needed in exchange for some dubious promises to cut spending and sell assets. Not quite the example the EU had hoped to set.

Too Little, Too Focused On Greece

Since Thursday, a number of additional concerns have been widely raised. Among them:

  • In his latest weekly review,’s Brian Dolan points out that while the EFSF’s scope has been broadened, the size of the bailout fund remains the same, and at €440 bln is well short of the € 1 trillion or more believed needed to support aid for Spain or Italy.
  • In the latest issue of his free newsletter Thoughts from the Frontline, John Mauldin does his usual spot on analysis of the latest EU developments, highly worthwhile, among the key points:
    • The estimated private sector losses are unrealistically low, both from the perspective of
      • what Greece can ultimately afford
      • the rising yields the bond market is likely to demand
    • The plan ignores the real threat, contagion, by focusing solely on Greece and not the other GIIPSs, all of which could easily need help.

Surely EU policy makers know all of this, so it seems that they’re still in band-aid mode, despite words to the contrary.

As always, watch GIIPS bond yields and other risk appetite indicators to see how markets may have digested these inconvenient details after a weekend’s reflection.

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