IMF urges EU to act, UK retail sales due.
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Once again a global organisation, this time the IMF, following on from the OECD earlier this week has voiced the proposal that the ECB has the means to resolve the European debt crisis at a stroke by being given full lender of last resort status, which would help break the insolvent bank, insolvent sovereign feedback loop. Its proposals were part of a report on the Eurozone outlining a clear timetable for action.
Unfortunately for the IMF this proposal isn’t exactly new and gets rolled out every time the crisis in Europe gets to a critical stage. It is also currently illegal under the terms of all EU treaties, and to be actioned would need the approval in the parliaments of all 17 EU member states, highly unlikely in the current political climate in Northern Europe especially.
Once again we appear to be at just such a critical stage with concerns about an escalation in the crisis coming from Italy with respect to the solvency of Sicily, where the region is said to be due to run out of money any day now.
These concerns have prompted fears that if Sicily goes bankrupt the contagion could well spread to other regions in Italy and escalate Italy’s borrowing costs even higher. Italy is also due to vote on the ESM today
With EU leaders already grappling with the costs and ratification of the Spanish banking bailout which is due to be debated today, in both the German and Finnish parliaments, the last thing EU leaders want or need is for markets to lose even more faith in Italian finances.
The respective votes should go through both parliaments, with Finland finding its collateral demands satisfied, while German Chancellor Angela Merkel may found she has to rely on opposition votes to get her way, as splits within Germany start to spill out into the open.
As it is conditions in Spain continue to deteriorate as the latest data from the Bank of Spain yesterday testifies. The latest housing data showed the strains in the Spanish economy as bad loans increased to 8.95%, the highest level in 18 years. With an economy firmly in recession and ?65bn worth of spending cuts in the next two years this figure won’t improve.
With this in mind today’s Spanish bond auction of about ?3bn of 5, 7 and 10 year debt will be a key test of investor sentiment towards Spain with once again, yields and bid to covers under particular scrutiny.
France is also looking to sell around ?8bn bonds, however given that its shorter term debt is getting negative yields this is one auction that should go ok.
In the UK the latest retail sales numbers for June are the latest in a long line of data this week from the UK economy.
This week we saw inflation drop sharply as a result of early summer discounting by retailers and lower oil prices ease pressure on incomes. Today we should find out whether that discounting translated across to a post Jubilee and per Olympic pop in retail sales spending.
The retail sales numbers this year have been very volatile, sharply negative one month then swinging into positive territory the next month. In March retail sales rose 1.8%, in April dropped 2.3%, rose 1.4% in May, and are expected to rise 0.6% in June.
EURUSD – still rangy in small triangle between 1.2200 and the 1.2310 area which suggests we could see a sharp 100 point move on a break above 1.2320, or a break below 1.2200.
In any case the price action still points to a move towards 1.1880 and the 2010 lows, but we do run the risk of a bigger short squeeze on a break back through 1.2300, which could see a move towards 1.2370 and even 1.2430.
The 55 day MA at 1.2580 remains a key resistance level on any short squeeze.
GBPUSD – once again the cable seems to be finding bids below 1.5600 which again continues to suggest nervousness about aggressive short positions. The long shadows on the daily candles seem to suggest we could see a move towards the 200 day MA at 1.5753, though we can expect to find some selling pressure around the July highs at 1.5720 and the 1.5685 area where we have the 55 day MA.
Pullbacks can expect to find some support at the 1.5520 area as well as 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 – the 0.7830 level held once again making three successive daily lows at 0.7830 with resistance at the 0.7880 level and this week’s high.
The move to the 61.8% retracement of the entire up move from 0.6535 and 2007 lows, to the 2008 highs at 0.9805 at 0.7784 remains the objective.
Once again the risk of a pullback remains ever present, but for now the week’s range predominates.
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 at 0.8025 and trend line resistance from the highs this year at 0.8505 at 0.8035.
USDJPY – while below the 79.30 level the risk of a move towards 78.20 initially, as well as the May low at 77.60 seems the most likely outcome.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 14 points higher at 5,700
DAX is expected to open 34 points higher at 6,718
CAC40 is expected to open 16 points higher at 3,251
FTSEMib is expected to open 103 points higher at 13,697