Bearish Outlook for the Euro and Oil

07/11/2013 9:00 am EST


Richard Rhodes

Founder, Rhodes Capital Management

European bourses have moved sharply higher. The reason is the recent decision by the ECB to follow the Fed's rhetoric of telling the markets they intend on "keeping interest rates low for an extended period of time," says Richard Rhodes of The Rhodes Report.

This is a change in tenor for the ECB, and it is giving rise to "risk-taking" across the investment landscape. We believe this comment was in reaction to the fact European bond yields were rising, and rising sharply, across the European landscape-especially the southern peripheral countries such as Spain, Italy, and Portugal.

Previously, Draghi's comments-that European policy-makers were willing to do anything to preserve the euro-allowed the ECB to jawbone bond yields lower.

This is exactly what is intended right now; and so far the markets are following his lead as Pavlov would have suggested.

Another result of Mr. Draghi's ECB comment is a falling euro. Many consider this to be bullish of European equities, and we cannot disagree for the moment, certainly.

But we must note that this comment has pushed the euro sharply lower, and sufficiently so that it now rests very precariously upon neckline support.

A breakdown of current levels to perhaps below 1.28 would target the 1.19 level. Now, taking this breakdown to its logical conclusion establishes a much more serious breakdown below 1.2000 to 1.2100-which is the neckline of a major 10-year "head & shoulders" topping pattern.

We put the odds of this breakdown at more than 60% given January's bar formed a bearish key monthly reversal to the downside, with the current decline simply resuming the decline in earnest. The ultimate target is a mind-numbing .8800...or -31% from current levels.

Meanwhile, we see a rather substantial shorting opportunity in the commodity markets at present given that the ECB comments are sending the euro lower and the US dollar higher.

This, coupled with the credit squeeze ongoing in China will pressure all the commodity markets, and in particular the copper and crude oil markets.

Now, each has its own particular fundamentals and technicals, but we shall be focusing upon the crude oil market, where the recent rally has been due to geopolitical concerns regarding Egypt.

This rally looks to falter given many of the market's concerns regarding the closing of the Suez Canal are starting to subside as the Egyptian military has taken control of the country.

We look for crude to weaken from current levels to downward of $70-to-$80 in the months ahead as inventories remain very high, with them likely to grow even further given the current high prices. Hence, we are buyers of Crude Oil 2x Short (SCO).

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