Europe set to open lower as German court fears weighs
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
European markets look set to open lower this morning ahead of tomorrow?s German constitutional court ruling on the legality of the new bailout fund (ESM) after an objection by a German MP Peter Gauweiler arguing that last week?s pronouncement by ECB president Mario Draghi to buy ?unlimited? bonds has the potential to change materially the potential liabilities to Germany and as such the impact of that needs to be considered in more detail.
The court is expected to rule as to whether it will accept the objection sometime today.
We should also get more detail today from the EU with respect to the latest proposals with respect to banking union proposals, which Germany has grave concerns about with respect to the impact on its savings banks sector. Germany wants the EU to cover systemically important banks, and leave regional banks to the local regulator.
Spanish Prime Minister Rajoy has also raised the stakes with respect to the terms and conditions Spain will accept in return for bailout money. Given that Spanish borrowing costs have fallen substantially since the ECB announcement last week it would appear that Spain feels less pressure to acquiesce than it did this time last week, thus creating further potential for disappointment as politicians contrive to grab defeat from the jaws of victory.
The reality could well be somewhat different in that the fall in costs can be predicated somewhat by the promise of action, but if Spain delays reforms and the Spanish regions refuse to play ball with respect to cost savings, these borrowing costs could well start to rise again. We saw evidence of the dislocation between Spanish central government and the regions at the end of last week when Catalonia announce it was spending ?6bn on a new leisure centre just days after announcing it was tapping the Spanish bailout fund for ?5bn due to a funding shortfall. Yesterday we saw evidence of market nervousness with a 15 point rebound in the Spanish two year yield from 2.714% to close at 2.887%.
In economic data out later today the UK economy will once again come under scrutiny with the release of the latest trade numbers for July with some expectation that after June?s disappointing Jubilee affected numbers could see a recovery in exports, which suffered a significant hit in June.
An improvement to -£9bn for July is expected from the disappointing -£10.1bn in June.
In the US the latest trade numbers are also due to come out for July after the significant improvement seen in the June numbers surprised some analysts and caused them to revise their Q2 GDP estimates for final US GDP for that quarter. This is particularly important given this week?s FOMC meeting where the Fed is widely expected by the market to embark on open ended QE for as long as it takes to get stronger economic growth. June?s numbers came in at -$42bn much better than the original -$49bn estimate and July?s numbers are expected to show a deficit of -$44bn.
The risk is that the markets are overestimating what the Fed may do this Thursday with the reality being that while the Fed may extend their low rate guidance they are unlikely to go further than that creating the potential for significant disappointment.
EURUSD ? we?ve seen a bit of a consolidation after Friday?s rally with further gains capped by trend line resistance at 1.2855 from high this year at 1.3485. This level also coincides with the 200 day MA at 1.2835. Given the strength of Friday?s move it would not be a surprise to see pullbacks from these levels back towards 1.2650.
Key trend line support from the 1.2045 lows now lies at quite some way back at1.2485, while above that we also trend line support at 1.2525 from the 22nd August lows at 1.2435.
GBPUSD ? the pound continues to remain fairly well supported rebounding from lows of 1.5960 yesterday. Trend line support comes in at 1.5875 from the August lows at 1.5490. 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 1.5575 from the 1.5240 lows.
Only a move beyond 1.6060 has the potential to target 1.6175 trend line resistance from the 2011 high at 1.6745.
EURGBP ? the single currency has tried and failed twice to break beyond the 0.8020 level suggesting the likelihood of a pullback towards the 0.7950 level. As long as any pullbacks hold above the 0.7950 level a push towards 0.8100 can still happen.
Below the 0.7950 level suggests a move towards the 0.7880 level.
A break below the 0.7880 level has the potential to retarget the 0.7820 area.
USDJPY ? we continue to hold above the 78.00 level and trend line support from the May lows.
It has so far managed to stay above the trend line support at 77.65 from the all time lows at 75.35 which remains a key level and obstacle to further declines.
We need to get back above the 200 day MA at 79.31 to target a return towards the highs last month.
Equity market calls
FTSE100 is expected to open 30 points lower at 5,763
DAX is expected to open 38 points lower at 7,175
CAC40 is expected to open 19 points lower at 3,487
FTSEMib is expected to open 112 points lower at 15,979