Market complacency looks set to continue
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Markets continue to drift higher on expectations of the prospect of additional central bank easing with trading volumes remaining well below seasonal averages. The absence of any good news has failed to dampen expectations; if anything it has reinforced the expectation that the authorities will take the necessary action to mitigate any problems in the coming weeks. The VIX certainly seems to reflect the complacency of the markets, trading as it is at 5 year lows.
The economic outlook in Europe remains pretty bleak with a recent poll suggesting that the Eurozone isn?t likely to grow in any meaningful way until 2013. If anything I would suggest that even that prognosis remains optimistic. With most of the economic numbers from Europe unlikely to show a pickup any time soon it suggests that this particular rally is built more on hope than expectation and the volumes certainly reflect that.
Markets certainly are placing an awful lot of their chips on ECB President Mario Draghi being able to pluck a rabbit out of the proverbial hat at the next meeting in September.
Markets certainly seemed reassured by comments from German Chancellor Angela Merkel yesterday in Canada in her first official comments since returning from holiday that she agreed with ECB President Mario Draghi?s comments to defend the euro by ?whatever it takes?.
What markets appear to have overlooked is that she allowed herself some wiggle room by committing to do what she can to maintain the euro. It?s not exactly on a par with ?whatever it takes?. What she can do is limited by the German constitution and her European partners. The sticking point for other EU nations is her insistence on EU oversight and intervention on the sovereignty of individual countries fiscal budgets. It?s certainly not reassuring to hear that Finland appears to be openly preparing for life after the euro, according to reported comments by its foreign minister
There was some good news yesterday with UK retail sales beating expectations in July, while the June figures were also revised higher as well. These revisions suggest that next weeks revision of UK Q2 GDP is likely to show that the initial -0.7% contraction was way off beam and once again reflects very badly in the ONS?s calculation methods.
EURUSD ? the failure to break below trend line support yesterday at 1.2270 from the 1.2045 lows has seen a rebound back towards the 1.2400 area. On the topside the key resistance is still the 55 day MA and resistance in the 1.2430/40 area
A break of the trend line support has the potential to retarget the 1.2150 area, as well as the 1.2045 lows.
The bullish weekly candle from two weeks ago still remains valid until such time as we break below 1.2045 so caution remains the watchword. A break below 1.2240 targets these lows and then 1.1880.
The key level on a monthly close remains the 200 month MA at 1.2060, the July lows.
GBPUSD ? even though we closed above the 200 day MA at 1.5725 for the first time since May we have so far failed to overcome the 1.5780 level which is 50% of the 1.6305/1.5270 down move.
We need to see a break above 1.5780 to target a move to 1.5910.
A break below the trend line support at 1.5500 from the 1.5240 lows suggests a move back to 1.5240.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? despite yesterday?s brief drop below 0.7820 the impetus was not strong enough to sustain the move. This area remains the key barrier to a test of the downside and previous lows at 0.7755.
A break of 0.7880 is needed to retarget the 55 day MA which remains strong resistance at 0.7955, along with trend line resistance at the same level from the February highs at 0.8505.
USDJPY ? yesterday?s close above the 200 day MA at 79.20 potentially sets up a move towards the weekly cloud resistance at 80.40, but we need to hold above 78.80 on an intraday basis. Below 78.80 reopens the downside and a return to the range lows and cloud support at 77.30 and the May lows at 77.60 remain a key level.
Equity market calls
FTSE100 is expected to open 12 points higher at 5,846
DAX is expected to open 6 points higher at 7,002
CAC40 is expected to open 14 points higher at 3,494
FTSEMib is expected to open 118 points higher at 15,048