Spanish bailout speculation continues, UK Public finances
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Dismal economic data and political tensions within Europe continue to dominate, with Spain once more at the epicentre as markets continue to speculate on the timing of a rescue plan for the Spanish sovereign, with speculation abounding that a plan is currently in the works, and could be unveiled next week, according to the FT.
There was some good news yesterday with Spain successfully raising ?4.8bn on the debt markets at lower yields and better bid to covers, while a further downgrade of Italy?s growth prospects for this year has raised new concerns about Europe?s third largest economy. .
Political tensions still remain with the Spanish regions, and in particular Catalonia as the differences between Madrid and its biggest region get ever more tense.
Demands by the Catalan leader Artur Mas for independent tax raising powers were not well received by Spanish PM Mr Rajoy, and rejected outright.
When looking at these divisions as an outside onlooker it is hard to see how Mr Rajoy will be able to deliver on any bailout promises he makes to Brussels, if and when he asks for one, when Spain?s biggest region refuses to play ball, in terms of budget responsibility.
The publication of today?s latest UK public finances numbers for August are expected to show that the Chancellor remains off course to meet his deficit reduction targets for this year. He was not helped by July?s poor tax intake in a month traditionally good for tax revenue, due to a drop in North Sea revenues.
Borrowings for this fiscal year are already at nearly £45bn; already well above the same period last year, which had a higher target.
Expectations for August are for a deficit of £13.2bn which is likely to increase calls for the Chancellor to accept that he will, in all probability, miss his targets, and consider extending his timetable out into the next parliament. In an interview last night Bank of England Governor Mervyn King suggested that given the bleak outlook for the global economy, it wouldn?t be the end of the world if he did.
The only question remaining would be how the ratings agencies might react to any deviation given that the UK is currently on negative outlook with all three and Fitch last month warned it would be cut if the UK deviated from its deficit reduction plan.
The Chancellor may have to decide what is more important, being pragmatic with respect to deficit reduction, and risk losing the rating, or ploughing on regardless.
Today?s numbers will certainly give us further clues as to how much more the government is spending despite lower unemployment numbers.
EURUSD ? yesterday?s low at 1.2920 brings the single currency back to sub QE levels and could well precipitate further losses towards the 200 day MA at 1.2830. Pullbacks need to overcome 1.3020 to suggest a move back to the recent highs at 1.3170.
It needs a push below 1.2830 to retarget the 1.2650 level with key trend line support from the 1.2045 lows now at 1.2580.
The key resistance on the upside remains at 1.3225, 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.
GBPUSD ? downside follow through on cable always seems to struggle, however the risk remains for a move back towards 1.6050 despite the resilience and yesterday?s rebound from 1.6165.
Below 1.6050 we have trend line support at 1.5985 from the August lows at 1.5490.
It needs a move above resistance at 1.6270 and 1.6305 to target a move towards 1.6590, last years 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 ? Yesterdays break below the 0.8000 level opens up the 0.7950/60 level which is a key support level. This area acted as strong resistance through August. Below the 0.7950 level reopens the 0.7880 area. To restore upward momentum we need to see a bounce back through the 0.8050 area to retarget last week?s highs.
USDJPY ? the US dollar managed to hold above the 78.00 level yesterday, however the risk remains for a retest of the lows last week at 77.25.
To stabilise in any meaningful way we need 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. 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 22 points higher at 5,877
DAX is expected to open 28 points higher at 7,417
CAC40 is expected to open 18 points higher at 3,528
FTSEMib is expected to open 115 points higher at 15,945