IMF set to downgrade growth forecasts.
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Over the past few weeks the general tone of headlines from Europe, US and China has been dominated with concerns about a lack of growth, slowing economic activity as well as the well documented concerns about the solvency of the European banking system.
Yet here we are coming off the back of six straight weeks of equity market gains, and yet none of these issues has been resolved or likely to be resolved in the coming months.
It would appear that investors continue to pin their hopes on the attempts of central banks to somehow stimulate non-existent demand with ever more helpings of new money and stimulus.
Last week?s Chinese GDP numbers have raised expectations of further stimulus from Chinese policymakers in an attempt to engineer a soft landing and an increase in economic activity.
Unfortunately for policymakers most of the problem is demand driven, or the lack of it thereof, and while further action might buy further time, unless policymakers start to get their act together in Europe and the US, it seems that further equity market upside could well be limited.
Growth estimates from the IMF will be in focus today especially after they rather optimistically raised their growth forecasts in April this year, for global growth.
They look set to reverse that move today in the wake of the events of the last three months. The only question remains by how much growth forecasts will be cut for the global economy as a whole as well as for Europe, the UK and the US.
As far as the US is concerned this week?s Humphrey Hawkins testimony by Fed Chairman Ben Bernanke to the Senate will bring with it further questions about the direction of future Fed policy and the likelihood of QE3 in the wake of last week?s Fed minutes and the recent weakness in US payrolls.
Today?s US retail sales numbers for June are likely to continue to remain weak with expectations of a very small gain of 0.2%, merely reversing the decline seen in the May numbers of -0.2%.
In Europe the main topic of discussion will once again be about the Greece bailout and how far behind Greece is with its timetable of reforms, as well as negotiations surrounding the Spanish banking bailout.
In a shift in tone the ECB has advocated imposing losses on senior bond holders of the most insolvent of Spanish banks in return for aid. While currently opposed by finance ministers it could be that the tide is shifting away from taxpayer funded rescues, given voter disquiet about the costs of saving reckless banks and countries currently being reflected in more prudent European countries.
Splits in Northern Europe are starting to get wider as the increasing costs of the crisis start to worry the more conservative countries in Europe, with Finland wanting collateral and splits forming within Germany itself. With the new bailout fund tied up in legal red tape by the German constitutional court. It means that the EFSF will be have to continue to be used in the meantime with Angela Merkel facing a revolt within her own coalition with respect to this Thursday?s vote in the German parliament. Ratings agency Moody?s has stated that the delay in implementing the ESM is credit negative for all euro nations.
EURUSD ? the triangle breakout seen at the beginning of this month still points to a move towards 1.1880 and the 2010 lows. Any pullbacks should find resistance at the 1.2290 level, and previous June lows. The risk of a bigger short squeeze remains on a break back through 1.2300, which could see a move towards 1.2370.
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 ? a death cross MA crossover on the daily charts last week signalled the potential for an increase in downside pressure, however the strength of Friday?s rebound suggests we could well see further gains. A daily bullish candle suggests the potential for further gains on a break back above 1.5620. The key resistance remains between 1.5720 and 1.5750 where the 55 day and 200 day MA?s converge.
While below 1.5580, however and the risk remains for a move back towards 1.5460 and last week?s lows at 1.5395.
Only a move below 1.5250 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? another three and a half year low last week at 0.7855 brings the euro close to 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.
While below the 0.8000 level, downside pressure predominates, though we also have resistance around the 0.7920 area.
The major resistance remains around the 55 day MA and trend line resistance from the highs this year at 0.8505 at 0.8040.
USDJPY ? the 200 day MA has so far managed to contain the downward pressure on the US dollar. This key support at the 200 day MA at 79.00, needs to hold to argue for a move through 80.40. A move below 79.00 targets 78.20.
The main resistance remains at the top of the cloud at 80.45 while we need a weekly close above 80.50 to reassure about further upside.
Equity market calls
FTSE100 is expected to open 3 points higher at 5,669
DAX is expected to open 2 points higher at 6,559
CAC40 is expected to open 7 points lower at 3,173
FTSEMib is expected to open 11 points lower at 13,704