Spain fears set to keep markets on the defensive
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Fears about the solvency of Spain emerged with a vengeance on Friday after the Spanish government cut its growth forecast for 2013 to -0.5%, at around the same time one of Spain?s indebted regions said it would be putting in a request for financial aid.
With voters pushing back on the government?s austerity plans, the room for manoeuvre of the Spanish government is diminishing by the day as the economy continues to deteriorate under a combination of rising unemployment and rising bad loans.
The fear now is that Valencia?s aid request is more than likely to open the floodgates for similar requests from the other 17 heavily indebted Spanish regions. Already speculation is increasing that Catalonia, or any one of a number of regions will be next. When that happens it will be pretty much nailed on that the Spanish government will then eventually need a bailout itself, stretching the funds of the EFSF to its limits.
This is why Spanish bond yields spiked sharply across the curve on Friday with 5 and 10 year yields pushing above 7%, while 2 year yields went above 5.5%, to completely unsustainable levels in the long term.
With the troika set to return to Greece tomorrow, there are reports that patience within Europe and the IMF is starting to wear thin and these reports suggest that unless the Greek government is able to deliver on its budget pledges and finalize its 2013 and 2014 austerity plans, then no further aid would be forthcoming, in which case Greece could default and leave the euro.
There appears to be a growing mood, unthinkable a year ago, that a Greece exit could well be managed, though given the problems in Spain right now a Greek exit is more than likely to start a slippery slope, towards fragmentation.
ECB President Mario Draghi certainly appears fairly sanguine about recent events, remarking at the weekend that the euro is ?irreversible? and not in any danger. When a central banker talks in such terms you can be sure that the opposite is true, otherwise why say it.
In any case it is the reluctance of further action on the ECB?s part that is encouraging speculation on just such an outcome. Draghi?s comments that it is not the ECB?s role to resolve EU government?s financial problems also blew a hole in the IMF?s strongly worded report last week that the bank should intervene to stem the debt contagion blowing like a firestorm through Europe?s bond markets.
This week?s latest European manufacturing and services PMI data from Germany, France and the rest of Europe are expected to reinforce the grim picture for economic growth across Europe.
Growth prospects aren?t expected to be much better elsewhere either this week, with preliminary Q2 numbers from the UK and the US later this week. The UK is expected to show a contraction for the third quarter in a row with a -0.2% reading, while US growth is expected to slip back to 1.5%, from 1.9%.
EURUSD ? Friday?s break below the triangular support line at 1.2225 saw the single currency move sharply lower and is likely to take it towards the 1.2050 level, thus bringing us closer to the longer term target at 1.1880 and the 2010 post Greek bailout lows.
Pullbacks should now be limited to the highs last week just above 1.2300. Only a break above this level targets 1.2520 the 55 day MA.
GBPUSD ? last week?s failure just below the 200 day MA as well as Friday?s bearish daily candle reinforces the case for the recent range to continues, but with a slight negative bias. To target a move towards 1.5910 we would need to see a close above the 200 day MA.
Pullbacks in the cable can now expect to find support at the 1.5540 area, as well as this month?s low 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 woes of Europe saw the euro hit 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 on Friday. The subsequent break below here suggests we could well see further weakness towards the October 2008 lows at 0.7695.
If that breaks there?s pretty much fresh air between that and the 2008 lows at 0.7390.
Resistance can be found at 0.7830, which provoked a number of rebounds in the early part of last week. The next resistance can be found at the highs this week at 0.7880.
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. This level is also the base of the weekly cloud.
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 42 points lower at 5,610
DAX is expected to open 58 points lower at 6,562
CAC40 is expected to open 47 points lower at 3,147
FTSEMib is expected to open 208 points lower at 12,859