EU finance ministers to discuss Spain and Greece bailout plans
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The post meeting optimism from the late June EU Summit has all but evaporated as once again different political interpretations get put on the outcomes of what was supposedly agreed at the meeting.
The apparent ambushing of German Chancellor Angela Merkel at the Brussels summit by Messrs Hollande, Rajoy and Monti appears to have been anything but, as markets also worry about the timeframes for implementation on bank recapitalisations.
As usual the main concerns surround the absence of any political consensus amongst EU leaders as the northern half of Europe once again, mindful of voter disquiet about fiscal transfers, once again talk about conditionality with respect to the release of bailout funds.
Reported comments last week from the Finnish finance minister that the country would leave the Eurozone rather than pay other countries debts has certainly served to raise the stakes, and this, along with concerns about a weak European economy has once again seen Spanish and Italian bond yields pushing back up to dangerous pre-summit levels.
Last week?s ECB meeting also left investors feeling flat on the basis that expectations had been slightly raised that the ECB would be slightly more radical, in the terms of what the bank actually delivered. Cutting the deposit rate to zero is all very well, but the fact is the reason banks are putting money overnight is more to do with capital preservation, and bolstering balance sheets, than a reluctance to lend.
The refusal of the bank to restart its SMP program due to concerns about a bond run and further risks to its balance sheet, is starting to leave Europe short of policy options to contain a further deterioration in the crisis.
Today?s European finance ministers meeting is expected to follow on from the measures agreed at the summit and look at agreeing interim terms for the Spanish bank bailout and how the EFSF/ESM would be expected to finance any bank recapitalisations.
Once again Germany and its allies like Finland and the Netherlands are pushing for strict conditionality in the terms of any bailout.
It is also today that the ESM is due to officially come into force, however even this has run into problems with the German constitutional court due to start deliberations on its legality tomorrow.
In Greece, having won a vote of confidence, the new Prime Minister Samaras confirmed at the weekend that the country was well behind its troika program, but would like a bit more understanding from Greece?s creditors with respect to the policy mix with some of the changes being proposed within two years, being delayed. He has also vowed to repeal austerity policies that have triggered job losses, while pledging to speed up privatisations, putting him and Greece on a collision course with the IMF, along with the troika.
This reluctance to water down the terms is understandable given that any delays or extensions would require a third Greek bailout, further straining political coherence in the rest of Europe.
EURUSD ? last week?s move below the June lows at 1.2290 now targets a move towards the 2010 post first Greek bailout lows at 1.1880. Any pullbacks should be contained to the 1.2450 area, which is pullback line resistance from Thursday?s triangle breakout below 1.2440 trend line support from the same 1.2290 low.
A daily close back inside the triangle retargets the highs last week at 1.2680, while behind that the 55 day MA at 1.2745 and 50% retracement level of the 1.3285/1.2290 down move at 1.2790.
GBPUSD ? the pound continues to look weak and a move below 1.5460 is likely to indicate the first signs of a return to the June low at 1.5270. Below 1.5250 signals a risk of a return to the July 2010 lows at 1.4950.
The 200 day MA at 1.5755 remains the key resistance on the topside.
Only a close beyond 1.5755 the 200 day MA could target 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move.
EURGBP ? last week?s close below the 0.7950 area to fresh 3 year lows increases the likelihood of further declines towards 0.7845 and the November 2008 lows.
The next long term target lies just below that though at 0.7784 which is 61.8% retracement of the entire up move from 0.6535 and 2007 lows to the 2008 highs at 0.9805.
Intraday resistance lies at the 0.8000 level, while the main resistance remains around the 55 day MA at 0.8060 and trend line resistance from the highs this year at 0.8505 at 0.8065.
USDJPY ? the trend line support at 79.50/60 from the 4th June lows at 78.00 continues to support the US dollar here.
The main resistance remains at the top of the cloud at 80.45 and the support above the 200 day MA at 78.95. To reiterate we need a weekly close above 80.50 to reassure about further upside.
Equity market calls
FTSE100 is expected to open 7 points higher at 5,670
DAX is expected to open 16 points higher at 6,426
CAC40 is expected to open 7 points higher at 3,176
FTSEMib is expected to open 54 points higher at 13,786