No comfort from Fed minutes as Europe tensions remain
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Investors looking for a strong signal that the Federal Reserve was leaning towards further easing would have been disappointed last night, after the release of the latest minutes.
Given that the very same meeting was the same meeting that approved the extension of ?operation twist? it shouldn?t really have been too much of a surprise. Two members indicated that additional bond purchases would be appropriate, while two others said they would be warranted in the absence of ?satisfactory progress? in cutting unemployment, or if downside risks increase.
Since the meeting in question some of the economic data has continued to be more tilted towards the downside; however it remains to be seen as to whether the deterioration would be sufficient to warrant a change in stance so soon. In any case market expectation has now shifted towards the next meeting starting on July 31st.
In Asia the Bank of Japan left rates unchanged, though they did make a small adjustment to their asset purchase scheme, adding 5trn yen to the short end, but cutting 5trn yen to their special loans program for banks. In South Korea the central bank did surprise markets by cutting rates by 0.25%, to 3%, for the first time in three years highlighting concerns about a slowdown in growth.
Yesterday?s actions by Spanish Prime Minister Rajoy to set a timetable for ?65bn worth of cuts in the next two years may have impressed the bond markets, as bond yields slipped back, but those yields will have to fall a lot lower if they are to have the effect that Spanish government ministers are hoping for.
On the streets of Spain the reality is somewhat different as opposition to the tax hikes and spending cuts reverberates through Spanish society.
The fact is ?65bn worth of cuts would be difficult in the best of times, but in an economy stuck in recession, they are likely to compound the problem.
Unfortunately for Mr Rajoy he doesn?t have much choice given the conditions being imposed by Brussels in exchange for helping the banks, but the hand he is being dealt is akin to being asked to play Russian Roulette with five of the chambers loaded, and not empty.
As for the banks the sovereignty of the Bank of Spain has been surrendered to the troika with the central bank required to provide updates on the restructuring process as all the small retailer shareholders who were mis-sold Bankia shares last year are wiped out.
Protests against austerity haven?t been confined to Spain either as across the border in Portugal medical staff have gone on strike to protest cuts in the health budget.
Today?s publication of the ECB monthly report is expected to paint a continuing worrying picture about the state of the European economy with the bank likely to be more dovish than usual with respect to monetary policy to justify last week?s rate cuts.
The release of Eurozone industrial production data for May is expected to bear these concerns out with expectations of a monthly reading of 0% and a year on year decline of 3.2%, much worse than the 2.4% decline we saw in April?s numbers.
EURUSD ? once again the single currency has made another new low at 1.2215 keeping the pressure firmly on the downside towards the 2010 post first Greek bailout lows at 1.1880. The risk of a pullback towards the 1.2450 level remains a possibility, while at these low levels.
A daily close back inside the triangle breakout retargets the highs last week and 55 day MA at 1.2680, while behind that the 50% retracement level of the 1.3285/1.2290 down move at 1.2790.
GBPUSD ? yesterday?s move higher managed to get to 1.5580, however the main resistance remains at the 1.5620 level, a break of which could well target the 200 day MA. While above the support just above the 1.5460/70 area the risks of further rebounds remain likely. 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.
Only a close beyond 1.5750 the 200 day MA could target 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move.
EURGBP ? the single currency continues its slow slide lower with another new three and a half year low at 0.7870 yesterday. Intraday resistance now sits around the 0.7920 area.
This keeps the momentum going for the move towards the 0.7784 level, which is 61.8% retracement of the entire up move from 0.6535 and 2007 lows to the 2008 highs at 0.9805.
Longer term resistance lies at the 0.8000 level, while the main resistance remains around the 55 day MA and trend line resistance from the highs this year at 0.8505 at 0.8040.
USDJPY ? yesterday?s move lower fell towards the 200 day MA at 79.00 before rebounding strongly from the 79.15 area, back towards the 80.00 area.
The main resistance remains at the top of the cloud at 80.45 we need a weekly close above 80.50 to reassure about further upside.
Equity market calls
FTSE100 is expected to open 24 points lower at 5,640
DAX is expected to open 19 points lower at 6,435
CAC40 is expected to open 13 points lower at 3,144
FTSEMib is expected to open 57 points lower at 13,804