Markets look to FOMC minutes
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
In the US last week?s disappointing June non-farm payrolls report has once again shifted the focus back to the ?will they won?t they? debate on when the Fed is likely to act with respect to QE3.
Given that the FOMC have just extended ?operation twist? until the end of the year, it seems very unlikely that they will change tack at the next meeting at the end of this month.
That won?t stop the market from poring over every nuance of today?s published FOMC minutes as it craves further stimulus, like a baby demanding its dummy. Markets will be looking for evidence of excessive dovishness relative to previous meetings, especially as most Fed minutes tend to be dovish anyway.
The fact remains that recent data, while not great, is not terrible either. More than anything its middling, especially when the latest June ADP data beat expectations by quite some distance, which makes the bar for any further Fed intervention that much higher, especially in an election year where any type of central bank intervention could be interpreted as politically motivated.
One other factor to weigh up is that the Dow and S&P500 are well above the levels when the first iteration of ?operation twist? was announced last year. For that reason alone it seems unlikely given last week?s dismissive market reaction to the combined Chinese, UK and ECB stimulus measures that the Fed will act unless equity markets nose dive violently, or US data falls off a cliff.
The divide between northern and southern Europe continued yesterday after the Netherlands sold three year government bonds at record low yields as investors went looking for any kind of safe return after French borrowing costs went negative on Monday, joining Germany in the negative yield club.
Spanish and Italian yields slipped back slightly after Spain?s borrowing targets were relaxed and the country was promised ?30bn worth of emergency funding. The news that Italian PM Mario Monti would not be standing for re-election in March has made a few investors nervous, given the unpredictable nature of Italian politics. That however is a story for another day.
In the light of last weeks ECB rate cut today?s latest German June CPI figures are likely to be scrutinised for evidence of further deflationary pressure in Europe. A significant move below the annualised 2% level is likely to raise speculation about a further rate cut at the August meeting of the ECB. The level of interest rates however is the least of Europe?s problems given the concern currently surrounding the ratification of the new bailout mechanism the ESM, which should have been active buy now.
The German constitutional court is in the unenviable position of having to rule on the legality of the new bailout mechanism in response to a number of lawsuits from across the political and professional classes concerned at the sovereignty overreach that the new legislation poses.
Political pressure is being exerted with German finance minister Schaeuble warning of serious consequences if the case goes on for too long, which could throw the euro project into doubt. This attempt to bounce the judges into a quick decision hasn?t gone down that well inside Germany; however the delay isn?t likely to be too serious, despite the headlines, given that the EFSF still has funds available to it.
EURUSD ? another new low at 1.2235 keeps the pressure on the downside for a move towards the 2010 post first Greek bailout lows at 1.1880. The risk of a pullback towards the 1.2450 level remains a possibility, while at these low levels.
A daily close back inside the triangle retargets the highs last week and 55 day MA at 1.2680, while behind that the 50% retracement level of the 1.3285/1.2290 down move at 1.2790.
GBPUSD ? the continued support just above the 1.5460 level keeps the recent range intact and makes the likelihood of a squeeze back higher towards the 1.5620 level a distinct possibility. A move below 1.5460 is likely to indicate the first signs of a return to the June low at 1.5270. Below 1.5250 signals a risk of a return to the July 2010 lows at 1.4950.
The 200 day MA at 1.5755 remains the key resistance on the topside.
Only a close beyond 1.5755 the 200 day MA could target 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move.
EURGBP ? the move yesterday below the 0.7900 level keeps the momentum going for the move towards the 0.7784 level, which is 61.8% retracement of the entire up move from 0.6535 and 2007 lows to the 2008 highs at 0.9805.
Intraday resistance lies at the 0.8000 level, while the main resistance remains around the 55 day MA at 0.8060 and trend line resistance from the highs this year at 0.8505 at 0.8065.
USDJPY ? the trend line support at 79.50/60 from the 4th June lows at 78.00 has given way and suggests we could well see a test of the 200 day MA at 79.00.
The main resistance remains at the top of the cloud at 80.45 we need a weekly close above 80.50 to reassure about further upside.
Equity market calls
FTSE100 is expected to open 25 points lower at 5,639
DAX is expected to open 21 points lower at 6,417
CAC40 is expected to open 13 points lower at 3,162
FTSEMib is expected to open 66 points lower at 13,802