UK Credit rating concerns after GDP miss
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Yesterday?s shocking UK GDP numbers were a sharp reminder of the problems facing the UK economy and likely to bring the usual concerns about the UK?s triple A rating which is already on negative watch. Certainly they will increase the pressure on the government to ease up on its current policy of reducing the deficit quickly. Despite the special factors in June there remains some suspicion about the numbers given the fairly positive PMI figures seen so far this year, as well as the falls in unemployment in recent months.
Given what is happening in Europe our credit rating would appear to be the least of our problems, and the loss of one of their ?triple A?s? certainly hasn?t pushed France?s costs higher, but yesterday?s figures have made more it more likely that the Bank of England will continue its easy monetary policy well into next year.
Comments yesterday by ECB council member Nowotny appear to have raised the possibility that the ESM, if and when it gets ratified by the German Constitutional Court could be allowed to have a banking licence, especially after earlier comments this week by ECB President Draghi that there were ?no taboos? when it came to preserving the euro.
Despite this it remains unlikely that such a measure could be brought in quickly given it would have to be ratified in every single euro member parliament.
Ratings agency Moody?s certainly isn?t making things any easier after it downgraded the outlook of 17 German banking groups to negative watch, in the wake of this week?s earlier action on the sovereign. The agency also downgraded a number of Dutch banking groups in the same way.
As bond yields on Spanish and Italian bonds fell back from their highs speculation has been rising that Spain could be forced into asking for a sovereign bailout in a matter of days.
Yesterday?s sharp move lower in bond yields suggests otherwise, and was also a welcome relief for Italy whose borrowing costs had been steadily rising in tandem with Spain?s this week.
Fears are now growing, given the current uncertainty that the ratings agencies could well cut Spain?s credit rating even further, thus triggering further downgrades on its banks and making them much more reliant on ECB funding than they already are.
Italy will also be under scrutiny this morning after yesterday?s pullback in bond yields, and the downgrade by ratings agency Egan Jones, when it goes to the market to sell ?2.5bn worth of 2 year zero coupon bonds.
In the US yesterday?s 8.5% plunge in new home sales for June has kept markets hoping that the Fed will be forced into some kind of action at next week?s FOMC meeting.
Today?s economic data includes the latest weekly jobless claims numbers which are expected to come in at 380k, down slightly from last week?s 386k, still well below the 400k mark which we saw in the early part of this year.
The latest June durable goods numbers are also expected to come in at 0.3%, down from 1.3% in May, however given Boeing?s numbers yesterday there could be an upward surprise in those numbers.
EURUSD ? the single currency appears to be finding some level of support around the 1.2050 area, with yesterday?s rebound with a bullish daily candle has filled the gap between the 1.2140 level and Friday?s close at 1.2160. A move through 1.2170 is needed to stabilise for a move towards the 1.2300 level.
If this were to occur it wouldn?t undermine the prospects for a move towards the 1.1880 level, it would just merely delay it.
A monthly close below 1.2150 is likely to be the catalyst for a move lower though we should also be aware that the 200 month MA comes in at 1.2060. We are on course to post the lowest monthly close for six years.
GBPUSD ? another daily Doji yesterday underlines the uncertainty with respect to the next move in cable. Even so the predominant range remains likely to hold sway here with resistance near the 200 day MA at 1.5750. There is trend line support at 1.5430 from the 1.5270 lows and this could conceivably hold any further downside pressure.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? yesterday?s break above the 0.7830 level suggests the possibility of further gains towards the 0.7880 level. After the bullish candle seen earlier this week, this was always a possibility. A break and weekly close above 0.7880, has the potential to herald a turnaround in sentiment after weeks of declines. A move above 0.7880 would then target a retest of the 0.8000 level and 55 day MA.
A break below the October 2008 lows at 0.7695 could well see a test of the 2008 lows at 0.7390.
USDJPY ? no change in view here as the US dollar continues to slide back towards the 77.60 May lows and the base of the weekly cloud. As long as this holds the downside the risk of a rebound remains quite high.
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 3 points higher at 5,501
DAX is expected to open 7 points higher at 6,413
CAC40 is expected to open 4 points higher at 3,086
FTSEMib is expected to open 6 points higher at 12,513