Fed afterglow set to recede
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
As markets bask in the afterglow of last week?s Fed action, investor attention is now set to revert back to Europe, after weekend meetings of EU finance ministers focussed on the weighty topics of Greece, Spain and banking union.
Unsurprisingly there was broad disagreement on all three, but then markets have come to expect no less, given the events of the last three years.
To begin with, the thorny subject of banking union has run into German opposition due to the scope and speed with which France and other countries want to act. Plans to have a mechanism in place by year end have been opposed as too optimistic by Germany.
Germany is also keen to retain primary oversight of its regional savings and Landesbanks, while outlining concerns about the ECB?s ability to suddenly take on so much extra work at such short notice. The German?s insist that the focus should start with the banks that are the most systemically important in Europe..
Germany is not alone with concerns about the make-up of the new regulation with Sweden and the UK raising doubts about the issue of voting rights and having regulation imposed on them, even though they aren?t in the euro.
The question of whether Spain needs a sovereign bailout, to go with its banking one, continues to be one that invites debate with the Dutch Finance minister putting the onus firmly back on the Spanish government at the weekend.
Currently there remains little incentive for Spain to ask for help given the sharp drop in borrowing costs seen in the past week; however that could well change if economic data continues to deteriorate, and yields start to rise again.
Another factor limiting the Spanish government?s room for manoeuvre was the weekend events in Madrid and Portugal, where there were rallies of thousands of people protesting existing austerity measures as austerity fatigue tests voter patience.
The Spanish government also has problems with its restless regional governments who refuse to be dictated to by central government on spending, raising the prospect of serious internal political tensions.
On the matter of Greece, there appears to be a softening of tone with respect to the prospect of allowing the beleaguered nation more time to get on top of its finances. On the face of it EU policymakers appear to be softening the markets up for the likelihood that Greece might have its repayment terms extended, even though the prospect of more money has so far been ruled out.
No decision is likely before the troika report sometime in October, but it would appear that EU leaders are straining every sinew to bend the rules in an attempt to prevent a messy default and departure of Greece from the euro, due to their fears of what the consequences might be.
It is also a key week for UK economic data with the latest inflation numbers for August, along with the latest Bank of England minutes, as well as the latest retail sales numbers, where we will see how much of an effect the Olympics had on UK spending habits. Did retailers catch a ?stay at home? draught as consumers stayed at home watching the medals roll in.
EURUSD ? Friday?s move to 1.3170 keeps the euro on course for 1.3250, trend line resistance from the 1.4940 highs of 2011. A move above 1.3250, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
Now that we are above 1.3000, it is going to take some move to get us back below there, while below that we also have the 200 day MA at 1.2830 with only a close back below the 200 day MA suggesting a move back towards 1.2650.
Key trend line support from the 1.2045 lows now lies at quite some way back at 1.2550.
GBPUSD ? Friday?s break above downtrend line resistance at 1.6175 from the 2011 high at 1.6745 has moves the pound closer towards the May and 2012 high at 1.6305. A move above 1.6305 targets a move to 1.6590, August 2011 highs.
Trend line support comes in at 1.5920 from the August lows at 1.5490. Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5590 from the 1.5240 lows.
EURGBP ? the single currency continues to push slowly towards the 200 day MA at 0.8150, which it should struggle to break in the near term. We now have minor support at the 0.8000 level, while a move below the 0.7950 level suggests a move towards the 0.7880 level.
USDJPY ? the US dollar found it difficult to sustain Friday?s decline rallying sharply over fears that the BOJ could well intervene in response to the Fed?s action on Thursday in order to protect Japanese exporters. The all time low currently sits at 75.35, but Friday?s rally has all the hallmarks of a basing pattern.
We need to get back above the 200 day MA at 79.31 to target a return towards the highs last month.
Equity market calls
FTSE100 is expected to open 30 points lower at 5,886
DAX is expected to open 36 points lower at 7,376
CAC40 is expected to open 20 points lower at 3,562
FTSEMib is expected to open 67 points lower at 16,557