Italian bond auction in focus after Spain rocked by double downgrade
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Today?s market focus is likely to shift away from Spain temporarily this morning and towards today?s Italian bond auction of ?4.5bn of longer term debt.
If yesterday?s auction of one year T-Bills is any guide Italian PM Mario Monti?s claims that the country won?t need a bailout could well ring very hollow indeed. The country sold ?6.5bn of one year paper at 3.97% well above the previous 2.34% and while bond yields aren?t yet at the levels seen last November they are getting perilously close as investors continue to fret about the lack of growth and the symbiotic embrace between the banks and the sovereign. Particular attention will not only be paid to the yield but also to the bid to cover ratio and the amount of external interest in the issue.
Still reeling from this week?s downgrades of its banks by Fitch, Spain was on the receiving end of yet more last night, this time by ratings agency minnow Egan Jones who downgraded the country to CCC+ with a negative outlook. This was then followed by Moody?s who cut Spain by three notches to Baa3 citing the Spanish government seeking up to ?100bn of external funding from the EFSF or ESM, which will increase the country?s debt burden. Moody?s also kept the rating on review for a further downgrade in the next three months.
Meanwhile in Greece the trickle of money from the Greek banking system appears to be starting to turn from a light jog into more of a canter as reports suggest that the daily outflows have increased from ?100m-?500m to between ?500m and ?800m a day ahead of this weekend?s elections.
Talk earlier this week that EU officials had been discussing contingency plans around capital controls and bank freezes have obviously been a contributory factor as companies and individuals withdraw money over fears that a return to their drachma may see the value of their cash reduced sharply.
In the US yesterday?s second successive monthly decline in retail sales, as well as sharp fall in producer prices, has raised expectations that the Federal Reserve might be tempted to look at extending easing measures at next week?s FOMC meeting.
If today?s May CPI numbers come in showing similar weakness speculation will no doubt increase with respect to this. The monthly figure is expected to show a drop of 0.2% while the year on year figure is expected to drop from 2.3% to 1.9%.
Weekly jobless claims are expected to remain around the 375k mark.
EURUSD ? the single currency continues is increasingly finding it difficult to sustain moves lower in the short term after the failure to move below 1.2430 earlier this week, as pressure builds on the resistance around the 1.2630 area.
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 resistance at the 1.5610 level remains the key obstacle to further gains after yesterday?s failure at 1.5600.
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.
On the downside there is trend line support from the 1.5270 lows at 1.5500 on the four hour charts.
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 single currency appears to be showing some signs of a recovery after the failure to get much below the 0.8000 earlier this week. The key resistance on the topside remains at the 55 day MA and trend line resistance from the February highs at 0.8504 now at 0.8135. A break above 0.8150 could well see further gains towards 0.8210 trend line resistance from the November highs at 0.8830.
On the downside there is trend line support from the recent lows at 0.7950, just below the 0.8000 level which could limit the downside here.
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 levels continue to lie either side of the cloud extremities at 80.40 on the upside and 77.90 on the downside. Continued speculation about further Fed QE next week will continue to weigh on the yen, though Friday?s BoJ rate decision might change the short term perspective on that.
The quick recovery back above the 200 day MA earlier this month remains a positive sign after this months sharp fall saw the US dollar just about hold inside the weekly Ichimoku cloud support.
Only a weekly close above the 80.42 cloud resistance line would suggest a stabilisation in the dollar towards 82.00.
Equity market calls
FTSE100 is expected to open 10 points lower at 5,474
DAX is expected to open 2 points lower at 6,150
CAC40 is expected to open 2 points lower at 3,028
FTSEMib is expected to open 17 points lower at 12,882