Giving The Rally A Chance

I was not very impressed with the announcement yesterday from central banks on dollar swaps. The coordinated move had a lot of bark but little bite. At current borrowing rates Italy is insolvent regardless of whether there is a dollar shortage or not.

The good news is that ECB has been defending peripheral yields since yesterday morning. Yields on the Italian ten year bond have fallen by over 50 bps since yesterday morning. We have seen the ECB defend peripheral yields before only to back down and let them soar. It will be very important for the ECB to keep this up.

While a consolidation might be in order there is no reason the current rally cannot continue. We will not be overbought for a while as the rally is only three days old and sentiment is still skeptical of a rally. This can turn out to be another rally to sell or the start of a bigger move. I believe the key will be the actions of the ECB. If the ECB continues to intervene and lower peripheral yields or a plan that includes the ECB is announced we should continue higher. If the ECB steps away and more plans with no funding are announced than this is likely just another rally to sell. I will give the bulls the benefit of the doubt until we are closer to an overbought reading.

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