EU finance ministers to discuss Spain bank aid
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Yesterday’s decision by the German parliament to pass the Spanish bailout and by a large majority as well is likely to make today’s EU finance ministers conference call to discuss the terms of the bailout or Memorandum of Understanding (MOU) a lot less problematic, and open the way to the release of the initial ?30bn which Spain needs by the end of the month.
In return the Spanish government has agreed to cede oversight of its banking system to the EU as well as a host of banking sector reforms.
It certainly can’t come a moment too soon given yesterday’s extremely disappointing bond auction, however the insistence that the money must go through the Spanish government, thus adding to Madrid’s debt burden, is making markets nervous, and putting upward pressure on yields.
Germany is insisting that this has to be the way it is done until proper fiscal oversight and accountability through an EU wide banking regulator is put in place, which isn’t likely any time soon.
The ECB’s alleged change of heart with respect to haircuts for senior bond holders for fundamentally insolvent banks is also putting upward pressure on yields, while comments from budget minister Montoro that the government had no money didn’t exactly help either.
This week’s UK economic data has proved to be somewhat of a mixed bag, with June inflation falling back sharply due to early summer discounting by under pressure retailers, and lower fuel prices. The hope was that it would give the June post jubilee retail sales a bit of a boost after the pre Jubilee 1.5% rebound in May. The result was a rise of 0.1%, which was well below expectations, of a 0.6% rise, suggesting that consumers remain cash strapped and cautious. They are likely to remain cautious when given what is happening with spiralling global food prices, as a result of the freak weather conditions globally that are wreaking havoc on harvests.
The result on the public finances is likely to be disappointing with the Chancellor already off the pace with his borrowing for this year already.
PSNB for June is expected to improve from May’s £15.6bn to £11.2bn, however given that the economy in Q2 is also likely to show a contraction when interim data is released next week, for the third quarter in a row, pressure will increase on the Chancellor to adopt a Plan B as urged by the IMF yesterday.
The international organisation expressed concern that the economy had stalled and suggested that some fiscal easing could be incorporated into the long term plan without an adverse reaction from markets, if conditions hadn’t improved by the end of 2012.
EURUSD – the failure to break out of the small triangle between1.2220 and the 1.2310 area keeps the single currency in its compressed range. A break either side suggests we could see a sharp 100 point move on a break above 1.2320, or a break below 1.2210.
In any case the price action still points to a move towards 1.1880 and the 2010 lows, but we do run the risk of a bigger short squeeze on a break back through 1.2300, which could see a move towards 1.2370 and even 1.2430.
The 55 day MA at 1.2580 remains a key resistance level on any short squeeze.
GBPUSD – yesterday’s cable move saw the pound as suspected head towards the 200 day MA at 1.5750. We could even see an overspill towards the June highs at 1.5780. To target a move towards 1.5910 we would need to see a close above the 200 day MA.
This week’s lows have been progressively higher on a day to day basis and as such pullbacks in the cable can now expect to find support at the 1.5620 area, as well as this weeks low at 1.5520, and last week’s lows at 1.5395.
Only a move below 1.5250 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP – yesterday’s break below the 0.7830 level saw the euro break sharply lower towards the 61.8% retracement of the entire up move from 0.6535 and 2007 lows, to the 2008 highs at 0.9805 at 0.7784. Yesterday’s low at 0.7790 brought us within touching distance, while a break below here targets the October 2008 lows at 0.7695.
Resistance can now be found at 0.7830, which provoked a number of rebounds earlier this week. The next resistance can be found at the highs this week at 0.7880.
The major resistance remains around the 55 day MA at 0.8025 and trend line resistance from the highs this year at 0.8505 at 0.8035.
USDJPY – while below the 79.30 level the risk of a move towards 78.20 initially, as well as the May low at 77.60 seems the most likely outcome.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 14 points lower at 5,700
DAX is expected to open 16 points lower at 6,742
CAC40 is expected to open 13 points lower at 3,252