Spanish bond sale a key test
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The continued decline in Spanish bond yields, along with S&P?s decision to state that it would not be downgrading Spain to ?junk? any time soon would on the face of it make it much more likely that Spain will defer asking for a bailout in the near future, thus prolonging market anxiety about when and what catalyst could start the ball rolling again, and concentrate political minds.
Today?s Spanish bond auction could be one such event when the Spanish government looks to sell ?4.5bn of 10 year debt. At one point on Monday yields were above 6%, however since then they have slipped back to close yesterday at 5.693%, still high, but a lot cheaper than at the beginning of the week.
The demand will be of particular importance here with a bid to cover of 2.24 on the previous auction, though the yield will definitely be lower than the previous 6.65%.
One thing is certain, if today?s bond sale gets away alright, then we could face a long wait until Spanish PM Rajoy feels compelled to seek help for Spain?s ailing economy.
The Spanish government continues to face a deteriorating economic outlook as well as political problems in its regions with Catalonia in particular demonstrating a particular secessionist demeanour.
Economic data is not expected to offer much comfort today, given the feeble rebound to 47.8 in the August China HSBC manufacturing PMI seen overnight, with the release of the latest services and manufacturing September PMI data fro France, Germany and the Eurozone. While some improvement is expected the reality is that all measures are likely to remain stuck firmly in contraction territory at levels between 45 and 49. Manufacturing in particular is expected to be particularly subdued at 46.4 for France and 45.2 for Germany.
September consumer confidence in the Eurozone is also expected to come in weak at -24.
In an important week for UK economic data yesterday?s MPC minutes focussed on the committee?s concerns about weak growth prospects, and higher inflation, weighing on household incomes.
Despite these concerns we?ve seen a mixed reporting season for UK retailers in the past week or so with good numbers from some retailers and caution expressed by others.
The release today of the August retail sales numbers will give a good indication of how much of a boost or otherwise was created by the Olympic Games. The concern is that the amount of TV coverage saw a decrease in footfall as people stayed at home, though we may well have seen an increase in food and drink sales as consumers watched events unfold on front of their TV?s.
Expectations are for a fall of 0.3%, down from July?s 0.3% rise.
In the US the latest weekly jobless claims are expected to fall back after last week?s hurricane Isaac induced jump to 382k, coming in at 370k.
EURUSD ? the single currency is finding some support around the 1.2990/00 area rebounding from 1.2995, but the onus remains for a move lower while the highs at 1.3170 cap the upside.
The key resistance on the upside remains at 1.3230, trend line resistance from the 1.4940 highs of 2011. A move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
A move below 1.3000 has the potential to see a move back to 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 1.2570.
GBPUSD ? the cable continues to struggle above 1.6270 suggesting the potential for a downward correction, on a break below 1.6180 towards 1.6050. Below 1.6050 we have trend line support at 1.5970 from the August lows at 1.5490.
It needs a move above 1.6305 as to target a move towards 1.6590, last year?s August high.
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 1.5610 from the 1.5240 lows.
EURGBP ? the euro continues to drift back towards the 0.8000 level after this week?s failure to get close to the 200 day MA at 0.8140. This remains the major obstacle to further gains. 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 ? yesterday?s failure to take out trend line resistance at 79.15 from the 20 April highs at 81.80, as well as the 200 day MA at 79.30 keeps the onus on the downside for the US dollar. Any pullbacks should find support around the 78.20 level as markets look to create a base. The 200 day MA at 79.31 remains the main obstacle to a return towards the highs last month at 79.70.
Equity market calls
FTSE100 is expected to open 25 points lower at 5,863
DAX is expected to open at 35 points lower 7,356
CAC40 is expected to open 22 points lower at 3,510
FTSEMib is expected to open 84 points lower at 16,016