Europe set for mixed open as caution remains
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
While the spike in Italian bond yields yesterday suggests that investors are concerned about a power vacuum in the aftermath of Italian PM Mario Monti?s imminent departure, it would appear that the single currency has shrugged off such concerns, rebounding from a three week low, given that the current front runner in the polls, Pier Luigi Bersani pledged to stick by Monti?s reforms.
It should also be remembered that Italian bonds have just come off the back of a rally that has seen yields fall from 6.5% to well below 4.5% in the space of three months, so some form of pullback was always likely given that Mr Monti was always going to step down next year in any case. The surprise was that he has done it earlier than markets had anticipated.
Despite the weekend resignation the problems of the Italian economy remain, with yesterday?s industrial production numbers for October showing a much bigger fall than expected, falling by 1.1% and raising concerns that Q4 could be even worse than the Q3 contraction which was confirmed at -0.2% yesterday.
Today?s only economic data of note is the latest German ZEW survey for December which is expected to show a slight improvement from November?s -15.7 reading to come in at -11.5.
This could well be a little on the optimistic side given last week?s growth downgrades from the ECB as well as the Bundesbank, which slashed its 2013 forecast from 1.6% to 0.4%.
If the Bundesbank is that pessimistic then it?s highly unlikely that German institutional investors will be any more optimistic than the central bank.
Meanwhile the extended deadline for Greece?s debt buyback is set to expire today with hopes high that it will get the required take-up in order to unlock the next tranche of aid.
In the US, talks with respect to the fiscal cliff continue with investors increasingly optimistic, that when push comes to shove so to speak, politicians will step back and agree a deal. Time will tell whether that optimism proves to be justified.
The recent adjustment in US Q3 GDP was came about as a direct result of improved trade deficit numbers and the latest October numbers are also expected to continue this improvement with the October trade deficit expected to increase slightly to -$42.6bn from -$41.5bn in September.
EURUSD ? the euro continues to find support at the 1.2880/90 level which is the 50% retracement of the up move from 1.2660 to last week?s high at 1.3125. It is also the 28th November low and a fall below here and a close below the 50 day MA at 1.2915 opens up a move back towards the trend line support from the 1.2050 low which sits at 1.2800, and the 200 day MA at 1.2790. The current rebound has the potential to return to the 1.3020 area.
GBPUSD ? the recovery from the 1.6010 level brings the 1.6120 level back into view and this remains a key obstacle for a rally towards 1.6200. A key support remains at 1.5980 and a break through here targets major trend line support at 1.5850 from the 1.5270 lows, the 200 day MA at 1.5870 as well as 1.5660.
EURGBP ? trend line support at 0.8020 from the July lows at 0.7755 remains the key level for the uptrend to continue. A break below the 0.8010 level targets the November lows at 0.7960, while a move back through 0.8080 is needed to stabilise.
USDJPY ? the US dollar remains stuck in the range between triple resistance at the 82.85 level with the base at 81.70. If we break below 81.60 then the potential is there for a move towards 80.50, and even 79.90.
We need a break above the 82.80 level to target a move towards the March highs above the 84.00 level.
Only below the 80.50 level suggests a move back towards the November lows at 79.00.
Equity market calls
FTSE100 is expected to open 2 points higher at 5,924
DAX is expected to open 13 points higher at 7,544
CAC40 is expected to open 11 points higher at 3,623