Spanish bank reports due, UK retail sales set to bounce back
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
As suspected, the Fed fell short of broader market expectations of further QE by doing the bare minimum it could have got away with by extending its “twist” program until year end, while at the same time cutting its growth and inflation forecasts over the next three years.
Notwithstanding that, preliminary Chinese HSBC manufacturing PMI also missed expectations overnight, dropping to 48.1 in June, a 7 month low and once again raising fears about the pace of the slow-down in the Chinese economy.
Yesterday’s sharp fall in Spanish bond yields was a welcome respite ahead of a key bond auction later this morning. Fortunately the amount is a mere ?2bn but the yields are once again expected to be quite steep, despite yesterday’s falls.
The reason for the fall in yields was speculation that Europe’s leaders were considering allowing the use of the bailout funds to buy bonds directly, however German Chancellor Angela Merkel poured cold water on the idea saying that it was “purely theoretical.” The idea will certainly be on the agenda at the start of today’s two day EU finance ministers meeting, but it is a long way from being a work in progress, simply because the new ESM doesn’t even exist yet.
Another subject on the agenda will be the release of two independent reports into the state of the Spanish banking system to determine how much of the ?100bn bailout is likely to be needed, to recapitalise the sector.
Some of the numbers being bandied about are in the range of about ?70bn, however given the deteriorating economic situation in Spain this number could well increase in an adverse scenario.
It will also give the lie to the IMF figure earlier this month which suggested that around ?37bn would be needed. In any case a significantly high number will raise the likelihood that the Spanish government could well need a bailout further down the line, an argument that so far Spanish PM Rajoy has insisted that Spain neither needs nor wants.
The importance of dealing with the crisis in Europe is likely to be reflected in this morning’s revised June manufacturing and services PMI data for Germany, France and the Eurozone.
Yesterday’s disappointing ZEW numbers for Germany suggested that the crisis was now in fact seeping into the core of Europe and today’s PMI’s are not expected to offer much comfort.
Only Germany’s services PMI is expected to return a figure in expansion, above 50 at 51.5. Manufacturing PMI for Germany is expected to stay at 45.2, while French is expected to decline further to 44.5 and the Eurozone at 44.8, from 45.1.
This continued poor performance is expected to increase expectations of a rate cut or other policy response at the next ECB meeting in July.
In the UK the likelihood of further QE in July also increased yesterday with the release of the latest minutes of the Bank of England MPC meeting. Another three policymakers joined David Miles in calling for more QE, with Mervyn King and Adam Posen joining him in calling for a further £50bn of QE while Paul Fisher calling for an extra £25bn.
They were outvoted on this occasion by the remaining five members as policy remained unchanged, but this could well change on a single vote after comments by external member Ben Broadbent yesterday suggested that the case for further stimulus had grown.
With that in mind the latest UK retail sales numbers will be of particular interest after the shocking 1% drop in April. Expectations are for a Jubilee bounce back of 0.9%, which would go some way to offset the horrible rain affected figure in April.
EURUSD – the risk of a move towards the 1.2820/30 resistance area remains a possibility, while above the trend line support at 1.2550 from the lows this year at 1.2290. There is some selling interest just above 1.2750 and the high this week, which for now is keeping a lid on things.
While the euro remains below 1.2820/30 area the focus remains to the downside.
A break of the trend line support from the 1.2290 lows at 1.2545 is likely to open up a move back towards the next support at 1.2430/40.
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 pound had another go at pushing above the 200 day MA at 1.5755 yesterday but was rebuffed at 1.5780, the 50% retracement of the entire down move from the 1.6305 highs in April to the 1.5270 lows in June. Until we get a close above the 200 day MA the risk remains for a lower pound.
With support at 1.5620 underpinning the downside, only a slide back below 1.5620 could well see the pound slide back towards the 1.5470/80 area.
Only a close above 1.5755, the 200 day MA and through 1.5780 targets 1.5910 which would be the 61.8% retracement of the same move. Support now lies at the 1.5610/20 area.
EURGBP – still in the range here after yesterday’s failure to breach the 55 day MA at 0.8105 which continues to cap on the topside.
The key resistance remains at this months highs at 0.8150 and is the main obstacle to a move towards 0.8200, the trend line resistance from the 0.8830 highs last November.
On the downside there is trend line support from the recent lows at 0.7950, at the 0.8000 level which continues to 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 – the US dollar appears to be finding some resistance at the 79.80 level as it continues to trade within its broader range.
The key levels remain either side of the cloud extremities at 80.40 on the upside and 77.90 on the downside.
The US dollar continues to hold above the 200 day MA at 78.80 for now which remains a positive sign, but a close back below shifts the focus to a much more negative stance.
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 23 points lower at 5,599
DAX is expected to open 31 points lower at 6,361
CAC40 is expected to open 10 points lower at 3,117
FTSEMib is expected to open 36 points lower at 13,696