Markets set to rise as Spain succumbs to a bailout
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The decision by Spanish PM Rajoy to acquiesce to the inevitable and request help for Spain?sailing banking sector at the weekend is the first sign of an acknowledgment of the problems facing the Spanish economy, but the fact it took so long in the face of so much denial remains a problem with respect to the credibility of the Spanish administration.
In the last month the sum needed has risen from initially ?15bn for the whole sector, then ?23bn for Bankia alone, to now a sum of ?100bn and an admission that despite repeated denials Spain does in fact need a bailout of its banks.
Be that as it may, the decision to grasp the nettle looks set to be greeted positively by the markets for the time being, but it is likely to be no more than a relief pop.
There do remain a number of answered questions like the problem of where this ?100bn is going to come from, given that it isn?t immediately clear whether it will come from the soon to be retired EFSF or the new European Stability Mechanism (ESM) which is due to come into effect in July.
This will be important given that if the money comes from the (ESM) any creditors will have preferred status which will subordinate existing bond holders and thus have the unintended effect of making Spain?s funding difficulties much worse, as investors will be reluctant to expose themselves to the added risk of finding themselves at the back of the queue, in the event of a potential future restructuring if Spain?s problems get worse with a deteriorating economic outlook.
In any case EU leaders will be relieved that the principle of a bailout has been agreed ahead of the coming elections in Greece, however the lack of conditionality could have unintended consequences with respect to the possible election result this weekend.
Anti-bailout party Syriza?s could well paint this bailout as the EU blinking in the face of pressure to rescue Spain and this interpretation could well affect the election result this weekend in their favour.
What is certain is that the loan, bailout or whatever you want to call it will push Spain?s debt to GDP ratio up by 10% of GDP and in one of many European countries battling rising unemployment and in recession, it is by no means certain that the ?100bn bail-out will be the end of the matter in a housing market crash that hasn?t reached rock bottom by any stretch of the imagination.
Until such time as the independent audit of Spanish banks has been completed later this month there remains a great deal of uncertainty as to the size of the black hole in Spain?s banking sector, given that Spain?s economy is eight times the size of Ireland?s economy and the Irish bank bailout has so far cost them over ?60bn.
EURUSD ? the sharp gap and move above the January lows and last week?s high at the 1.2630 level needs to be sustained for a retest of the 1.2820/30 level.
On the downside there is support at this month?s low at 1.2290 but the primary objective remains the 2010 post first Greek bailout lows at 1.1880. It still remains highly likely we will see these levels, though we might also find some support around the June 2010 lows at 1.2150.
GBPUSD ? having found a base at the beginning of the month below the 1.5300 area the key question now is whether we will see this level hold and see a rebound back through the 1.5610 level towards 1.5680 and the 1.5730 area.
With fairly solid support between 1.5230 and 1.5260 the odds favour a rebound, but a break below could well see further weakness towards 1.4950.
EURGBP ? downside pressure remains the predominant theme while below the 55 day MA and trend line resistance from the February highs at 0.8504 at 0.8150.
Support can be found at the 0.8040 area and last weeks? lows while a break below that opens up the May lows at 0.7950 once again..
If we break below these lows at 0.7950 then we could well be set for the move towards 0.7845 and the November 2008 lows.
USDJPY ? the key question since the June lows at 77.60 really surrounds whether or not we will see further yen strength, or whether we can now recover back above the 80.00 level and stabilise. The quick recovery back above the 200 day MA is a positive sign after this months sharp fall saw the US dollar just about hold inside the weekly Ichimoku cloud support.
The key levels lie either side of the cloud extremities at 80.40 on the upside and 77.90 on the downside.
Only a weekly close above the 80.42 cloud line would suggest a stabilisation in the dollar towards 82.00.
Equity market calls
FTSE100 is expected to open 100 points higher at 5,535
DAX is expected to open 169 points higher at 6,300
CAC40 is expected to open 66 points higher at 3,118
FTSEMib is expected to open 229 points higher at 13,784
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