European discord weighs ahead of German IFO
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Markets look set to open the week lower this morning, as once again over the weekend, we have had the usual news flow about disagreements between EU leaders with Germany and France unable to agree over the speed of progress on banking union.
France has also broken ranks and urged that Greece be given more time as the beleaguered country strives to come to an agreement on about ?13bn of new austerity measures.
This remains a contentious call especially with Germany and Finland who insist that Greece must stand by its commitments.
In Greece the country is set to be hit by a wave of strikes this week from workers protesting at the latest in a new wave of cuts, as the government awaits the next visit of the troika, after their departure a couple of days ago.
As yet there remains no detail on how big a budget gap Greece is trying to fill with speculation in some circles that the troika report could well be delayed again, this time until after the US elections in order to avoid a potential shock to the global economy, as well attempt to smooth an Obama re-election.
There is also renewed talk about a recycled story that the new ESM would be leveraged up to ?2trn, not exactly a new idea, given that the EFSF was also the subject of similar speculation when it was first launched a year ago, however Finland amongst others has apparently objected to this course of action.
With disagreements between European leaders nothing new, and part of the normal weekend news flow, economic data also remains problematic, especially the dramatic deterioration in French data last week, though there have been silver linings with last week?s slight improvement in German ZEW expectations. This shouldn?t really have been too much of a surprise given the ratification of the ESM by the German constitutional court a couple of weeks ago, which helped fuel this month?s recovery in the euro back above 1.3000.
Another test of sentiment will be today?s German IFO Business climate and expectations survey for September which is expected to show minor improvements to 102.5 and 95 from 102.3 and 94.2 respectively
Talk at the end of last week that EU officials were in secret talks with Spanish officials about some form of reform package, as well as a rescue package for Spain, helped give Spanish markets a late push on Friday, with speculation that some form of package could well be announced later this week.
Later this week we also get the final report into the solvency of the Spanish banking system, with varying estimates that Spanish banks could well require up to ?70bn to recapitalise their banks. Given that recent data from the Bank of Spain stated that 9.86% of all Spanish loans are currently nonperforming, about ?170bn worth, this suggested amount barely seems credible, given that unemployment is still rising, the economy is contracting and new austerity measures have yet to bite.
EURUSD ? the rebound from Thursday?s low stalled at 1.3050 last week before slipping back. We need to hold above the 200 day MA at 1.2830 for the recent rebound in the euro to be sustained.
It needs a push below 1.2830 to retarget the 1.2650 level with key trend line support from the 1.2045 lows now at 1.2600.
The key resistance on the upside remains at 1.3220, trend line resistance from the 1.4940 highs of 2011. A move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD ? even though we saw a test of 1.6300 and a new high for the year, the failure to take out 1.6305 just about keeps the downside risk intact. The risk remains for a move back towards 1.6050 despite the resilience and yesterday?s rebound from 1.6165.
Below 1.6050 we have trend line support at 1.6000 from the August lows at 1.5490.
It needs a move above resistance at 1.6305 to target a move towards 1.6590, last years August high.
Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5620 from the 1.5240 lows.
EURGBP ? the 0.7950/60 is a key support level for the euro, given it was strong resistance in August and is the main obstacle to a return towards the 0.7880 level. To restore upward momentum we need to see a bounce back through the 0.8050 area to retarget the highs two weeks ago.
This area acted as strong resistance through August.
USDJPY ? a bit of an up and down week last week, but while the US dollar has thus far been able to hold above the 78.00, rallies remain weak, suggesting a return to the lows earlier this month at 77.25.
To stabilise in any meaningful way we need to take out trend line resistance at 79.15 from the 20 April highs at 81.80, as well as the 200 day MA at 79.30. The 200 day MA at 79.31 remains the main obstacle to a return towards the highs last month at 79.70.
Equity market calls
FTSE100 is expected to open 51 points lower at 5,802
DAX is expected to open 23 points lower at 7,429
CAC40 is expected to open 23 points lower at 3,508
FTSEMib is expected to open 163 points lower at 15,828