Stimulus speculation lifts equities, but rising Spanish and Italian yields worry
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The slightly firmer tone in equity markets overnight appears to be predicated by optimism that we may well see some measures from central banks in the coming days after comments yesterday from FOMC member and Chicago Fed President member Charles Evans suggested that more easing could well be required to help jobs growth, ahead of next week?s Fed meeting.
Separate comments from ECB policymaker Makuch also helped with the suggestion that ECB rates could well fall to zero, something that Draghi hinted at last week, however this was tempered by the fact that further LTRO?s were ruled out.
In any case, the pressure on Spanish and Italian borrowing costs continued on their recent upward trajectory, with Spanish yields hitting post euro highs at 6.8% on the 10 year yesterday, closer to the key 7% level that proved unsustainable for Greece, Ireland and Portugal. With Italy due to sell 1 year bills today and 3 year bonds tomorrow, the pressure on Europe?s third largest economy is building once again.
As such Germany is coming under increasing pressure to relax its opposition to a number of measures that may ease the crisis, including a banking union.
As far as Spain?s bank bailout is concerned, German Chancellor Angela Merkel is set to meet opposition leaders today to try and agree on when the ratification of the new bailout mechanism, the ESM and the fiscal compact can take place, so that the measures are agreed before this month?s EU summit on June 28/29th.
At the same time fears about the outcome of the weekend Greece election continued to keep investors wary with reports that daily cash withdrawals in the country have increased from around ?100m to the upper end of ?500m a day, as concerns grow that this weekend?s election result could be a precursor to the beleaguered country leaving the single currency.
Clues as the timing of a possible ECB rate cut could come from this mornings German May CPI data which is expected to show a decline of 0.3% on the monthly measure for the second month in a row, though the annualised figure is expected to remain at 2.1%.
In further signs of weakening demand in Europe April Eurozone industrial orders are expected to show further deterioration with expectations of a decline of 1.2%, and a 2.7% drop annually.
In the US the latest retail sales numbers for May are expected to point to further weakness on the part of the consumer with a fall of 0.2%, weakening further from the April 0.1% decline.
Producer prices for May are also expected to show weakness as well with a monthly decline of 0.6% expected largely as a result of falling oil prices.
This would bring the annualised figure down from 1.9% to 1.2% and with CPI numbers out tomorrow expected to show similar weakness would raise market expectations that we could well see further Fed action to stimulate the economy at next week?s FOMC meeting.
EURUSD ? yesterday?s failure to push through the support in the 1.2430/40 area raises the possibility of a move back towards the 1.2630 level.
Even so the focus remains firmly on the downside and for a retest of the lows at 1.2290, on a break below 1.2430, while below the resistance at 1.2630. A move above 1.2630 argues for 1.2820/30.
The primary objective still remains the 2010 post first Greek bailout lows at 1.1880, but we could see a bit of a short squeeze first.
GBPUSD ? the pound has managed to find some support in the mid 1.5400 area, just above the 1.5420 support mentioned yesterday.
While it remains unable to take out the 1.5610 area the risk remains for further range trading between this weeks low and this resistance area. A move above 1.5610 could well see further gains towards 1.5680 and 1.5780, which would be a 50% retracement of the entire down move from 1.6305 to the 1.5270 lows at the end of May.
The key support remains between 1.5230 and 1.5260 and lows for the last nine months which if broken could well see a sell-off on a break of this level towards 1.4950.
EURGBP ? the break below 0.8040 yesterday saw the single currency slip down towards the 0.8000 level. There is trend line support from the recent lows at 0.7950, just below the 0.8000 level which could limit the downside here.
The main resistance remains at the 55 day MA and trend line resistance from the February highs at 0.8504 now at 0.8140.
If we break below the recent 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 13 points higher at 5,487
DAX is expected to open 38 points higher at 6,199
CAC40 is expected to open 20 points higher at 3,067
FTSEMib is expected to open 43 points higher at 13,023