Europe reassessment and US jobs data gives markets a boost
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
After the initial disappointment of Thursday’s policy inaction by the ECB markets, once they had time to reflect, decided that Thursdays outcome and Draghi?s comments may not have been as bad as initially thought. This reassessment combined with an improvement to US payrolls data, albeit with a slight uptick in the unemployment rate, saw markets rally strongly into the weekend. The question now is, can it last?
ECB President Draghi’s shift on potential intervention in short term Spanish and Italian bond markets, while falling short of immediate market expectations was a shift in tone for the ECB, albeit with strict conditionality.
For a country to qualify for potential ECB help in keeping bond yields down, they would have to conform to the strict conditionality of a bailout program, which now places the ball firmly and squarely back in the Spanish government?s court.
Weekend speculation now surrounds whether or not Spanish Prime Minister Rajoy will reverse his governments previous strong resistance that they don’t require a sovereign bailout to go with their banking bailout.
This speculation has been boosted by reported comments by Mr Rajoy at the weekend that he would consider making such a request, after previously insisting that Spain would not need a bailout.
This would be an enormous climb down on his part, and could also be politically ruinous, as well as potentially heralding the beginning of the end of his government as politically credible, given the number of previous climb-downs and policy mishaps we’ve seen over the past few weeks, from Spanish government figures.
If last week?s events were important in one respect, they were an admission by the ECB that inaction was no longer an option, and while the undertaking to act is indeed welcome, the intention so far remains only verbal. Any action by the ECB remains dependant on a variety of political factors which need to fall into place, and if the history of this crisis over the past few years has taught us anything, any relief rally has a tendency to be short lived.
Investors would do well to remember that about previous relief rallies before they get too carried away, after Friday?s strong rebound.
Some of these political risks affecting the euro were highlighted at the weekend by the Italian Prime Minister Mario Monti in an interview with Der Spiegel where he highlighted rising national resentment caused by the current crisis as a risk to the longevity of the European project, which needed to be fought against.
Meanwhile in Greece, the government and its creditors finally agreed on the need for more budget cuts after more than a week of negotiations in Athens.
EURUSD ? Friday?s surge higher above trend line resistance from the 1.3285 highs in May at 1.2345 saw the euro close higher for the second week in succession.
The 55 day MA at 1.2430 now becomes the next obstacle to a move to 1.2600. The bullish weekly candle from two weeks ago seems to be gearing the market up for a euro rally.
It would take a move back below the1.2220/30 area, to undermine that scenario and retarget the 1.2150 area.
The key level on a monthly close remains the 200 month MA at 1.2060, the July lows.
GBPUSD ? long lower tails on the weekly candles suggest a fair amount of support, however upside remains limited while below the 200 day MA and resistance between 1.5740/80. Above here and we could see a move to 1.5910.
Key support remains at the trend line support at 1.5450 from the 1.5270 lows and any push lower needs to hold to prevent a move back to 1.5270.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? Friday saw the single currency break the shackles of the 0.7880 area which suggests we could well see a push towards the 55 day MA at 0.7980 and trend line resistance at the same level from the February highs at 0.8505.
To undermine this scenario we would need to see a push back below the 0.7880 area to retarget the 0.7820 area. As in EURUSD we?ve also seen two positive up weeks with the bullish weekly candle of two weeks ago suggesting limited downside in the short term.
USDJPY ? the US dollar remains becalmed between support below 78.00, and resistance above 79.30.
The cloud support at 77.30 and the May lows at 77.60 remaining a key level. 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 unchanged at 5,787
DAX is expected to open 29 points higher at 6,895
CAC40 is expected to open 13 points higher at 3,387
FTSEMib is expected to open 28 points higher at 14,153