Central banks gear up ahead of weekend Greek poll
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The weekend elections in Greece are likely to continue to weigh on sentiment as markets speculate on the various possible outcomes, ahead of next weeks G20 meeting. Even though Greece is officially in a polling blackout it hasn?t stopped rumours about a possible New Democracy win helping Greek equity markets rally yesterday. Reports from G20 officials that central banks stand ready to provide liquidity next week in the event of market stress sent US markets spiking late last night.
Despite this the reality is whatever happens this weekend, nothing will have materially changed in Greece on Monday, as it will be increasingly unlikely that any single party will be able to form a government on its own.
It is more likely that we will see events unfold along similar lines after the last election as the various parties strive to form a stable government. The one differing variable could well be if Syrizas comes out with the largest share of the vote, which could make markets more twitchy than normal given Alex Tsipras recent rhetoric. Whoever wins it seems likely that Greece?s future will remain uncertain given that the latest unemployment figures showed yet another increase, to 22.6% with youth unemployment.
Spain?s woes continued to worsen yesterday as its borrowing costs continued to rise briefly touching 7% on the 10 year measure as the ECB announced it had reached the limits of its mandate.
As pressure continues to build on Germany to do more to alleviate the crisis German Chancellor Angela Merkel has pushed back against her critics in Europe and the G20, saying that it can?t be left to Germany alone to sort out Europe?s problems, given that Germany only has limited resources.
This defence suggests that she remains in no mood to budge on her stance that there will be no movement on debt mutualisation. It also suggests that Monday?s G20 meeting could well be a fiery affair as the German Chancellor pushes back on Italian and French attempts to pass off the debts off their banks onto German taxpayers by way of Eurobonds and debt mutualisation.
Due to the uncertainty created by the deteriorating situation in Europe the Bank of England and the UK Treasury last night announced plans to push the start button on co-ordinated steps to pump up to £100bn of cheap credit into the UK economy. In a plan reminiscent of the ECB?s LTRO the Extended Collateral Term Repo Facility (ECTRF) could pump as much as £5bn a month into the UK economy to address any liquidity shortage problems, as well as offering cheap loans to banks in exchange for the banks lending the money into the economy, in a form of funding for lending program.
In the UK the latest trade balance numbers for April are expected to come in showing a deficit of £8.5bn.
Speculation about further easing by the Fed increased yesterday after US May CPI figures showed similar weakness to the previous day?s factory gate prices. The May CPI showed a fall of 0.3%, driven largely by lower gasoline prices, while weekly jobless claims rose more than expected to 386k.
Today?s industrial production numbers for May are expected to show a significant drop from a rise from 1.1% in April to a mere 0.1%, while Empire Manufacturing for June is expected to drop back from 17.09 in May to 13.5.
EURUSD ? the single currency continues to make any meaningful progress above the 1.2600 area with the 1.2630 area remaining the key resistance on a closing basis.
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 as the highs of the last two weeks continue to cap.
While it remains unable to take out the 1.5610 area the risk remains for further range trading between this weeks low at 1.5460 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 single currency appears to be struggling to maintain much in the way of progress above the key resistance area which is 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 ? not much to add here as 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 US dollar.
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 28 points higher at 5,495
DAX is expected to open 36 points higher at 6,174
CAC40 is expected to open 22 points higher at 3,055
FTSEMib is expected to open 60 points higher at 13,145