Spain unemployment expected to tick higher
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Yesterday?s market rebound suggests that markets believe that at some point fairly soon Spain will feel compelled to request further aid, in addition to the banking bailout agreed at the June EU summit.
There have been some reports out of Europe which suggest that an aid request may be forthcoming fairly soon, however a certain recalcitrance on the part of Germany suggest that such a request may not be as straightforward, and could run into problems as a result of the recent German court ruling.
With problems mounting up elsewhere in Cyprus and Greece there is a concern that multiple requests for bailouts run the risk of running into a roadblock in the Bundestag which would have to vote on them individually, as per the court ruling, which raises the prospect of a possible rejection. These reports also suggest a single request could be made as part of a bundled package, hence the delay while the EU tries to get all its bailout ducks in a row.
The latest economic data due out this week is likely to reinforce an expectation of an aid request with Spanish September unemployment figures due out today likely to show a further increase of 57k, further adding to the pressure on Spain?s buckling economy, and an unemployment rate already exceeding 25%.
The manufacturing sector in Spain continues to struggle, showing a slight improvement in September, coming in at 44.5, and this improvement along with a positive market reaction to Friday?s stress test results helped push bond yields slightly lower yesterday.
Ratings agency Moody?s dismissed the results of Friday?s independent assessment of the banking report stating that it felt that a figure more in the region ?100bn could be needed.
In Greece the troika has returned to Athens where there remain ongoing discussions about around ?2bn of further cuts, as the Greek government attempts to agree a new budget plan against an economy that is expected to contract 6.5% this year and by 3.8% next year.
In the UK yesterday?s disappointing manufacturing PMI number for September has tempered expectations of a bounce back in GDP growth in Q3, after contracting at 48.4, much more than anticipated. Today?s construction PMI numbers are expected to show a small improvement from August?s 49 reading, though they won?t be anything to write home about, with a figure of 50 expected.
The construction sector has been one of the major drags on GDP in recent months so a good figure could provide a significant boost.
As fears about a slowdown in China intensify and translate into a weaker outlook for the Australian economy the Reserve Bank of Australia decided to act this morning and cut interest rates by a further 0.25% to 3.25%, with expectations growing of a further cut by the end of this year.
Since November last year the RBA has cut rates by 1.5%, suggesting that despite all the optimism that China will avoid a hard landing, yet another central bank has intervened in an attempt to cushion the effects of a global slowdown.
EURUSD ? despite a low of 1.2805 yesterday the single currency once again has stayed above the 200 day MA at 1.2830. This remains the key level preventing a move lower.
It needs to close below 1.2830 to retarget the 1.2650 level with key trend line support from the 1.2045 lows now at 1.2675.
The bigger trend line resistance level remains from the 1.4940 highs at 1.3195, but to even get here we need to see a rebound beyond last week?s highs at 1.2990.
Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD ? having broken below the 1.6150 area, the lack of follow through, finding support at 1.6110 prompted a pullback to 1.6180 which still suggests we can see a move towards trend line support at 1.6085 from the August lows at 1.5490. A move below here targets a move towards 1.5915, 38.2% retracement of the up move from 1.5270.
A move back above 1.6200 retargets last week?s high at 1.6310.
It needs a move above resistance and last weeks high at 1.6310 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 1.5645 from the 1.5240 lows.
EURGBP ? a slightly higher high at 0.8002, momentum appears to be shifting for a move towards the 0.8050 area, a break of which could retarget the September highs at 0.8115, and 200 day MA.
Any declines should find support at last week?s low at 0.7925, as well as trend line support from the 0.7755 lows at 0.7905.
USDJPY ? after Friday?s positive day the yen has struggled to push above the 78.20 area.
Support remains at the 77.25 area. To stabilise in any meaningful way we need to take out trend line resistance at 78.90 from the 20 April highs at 81.80, as well as the 200 day MA at 79.32. The 200 day MA at 79.32 remains the main obstacle to a return towards the highs in August at 79.70.
Equity market calls
FTSE100 is expected to open 28 points lower at 5,792
DAX is expected to open 41 points lower at 7,286
CAC40 is expected to open 25 points lower at 3,410