Long term Spanish yields rise as Moody?s downgrades Catalunya
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Last night?s downgrade of five Spanish regions, including Catalunya by ratings agency Moody?s may not tell us anything new with respect to the economic problems facing Spain, but it does conclude the review Spain and its regions announced by the ratings agency in June earlier this year.
It is also likely to keep the pressure on the Spanish government?s finances, given that the regions are likely to become much more reliant on the central government bailout funding facility as their interest costs rise.
The recent softness in long term Spanish bond yields reversed sharply yesterday in the wake of the rather mixed regional election results at the weekend. While Prime Minister Rajoy may have convinced voters in Galicia, his home region of the merits of his government?s current economic policies, voters in the Basque region weren?t so convinced, with nationalist and separatist parties increasing their share of the vote.
The result in Galicia will certainly have vindicated PM Rajoy?s decision to hold back any decision on a bailout request, which could well have cost him crucial votes; however pressure will start to increase especially if bond yields start to creep back higher again and the Spanish government continues to stall on a decision on when to ask for help.
Fears about Spanish separatism are unlikely to diminish in the near term given the weekend result in the Basque Country, and with next month?s Catalan election another key uncertainty, and likely to fuel secession concerns, Mr Rajoy?s path continues to look strewn with potential potholes.
As such the waiting game between the markets and the Spanish government looks set to rumble on with both parties awaiting each others next move in a continued Mexican standoff.
The fact is the recent fall in Spanish yields and relative success of recent bond auctions has taken the pressure off the Spanish government, and given that Spain has managed to raise over 80% of its funding requirements for this year, it is likely to take an unexpected turn of events for a request for ECB help to come any time soon, and could well see the current game of chicken continue into next year.
Today?s Spanish auction of between ?2.5bn and ?3.5bn three and six month t-bills is expected to highlight this very point, with the recent sharp fall in yields, particularly at the short end, set to see the auction pass uneventfully.
In an otherwise light economic calendar, the only data of note is Eurozone consumer confidence for October which is set to remain stuck at -26.
In the UK the latest September BBA mortgage approvals data is expected to show a slight increase to 30.9k from 30.5k in August.
EURUSD ? the single currency has so far resisted all attempts to break above the September highs at 1.3175 and trend line resistance at 1.3122, from the 1.4940 highs.
The pullbacks seen over the last two weeks have continued to find support above the 200 day MA now sited at 1.2835.
There is also support at Friday?s lows at 1.3010/20 area.
Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD ? the pound continues to find support below the 1.6000 level between 1.5960 and 1.5980 and 55 day MA.
The declining highs since September?s 1.6310 high suggest a risk of a break lower with resistance from those highs coming in at 1.6160.
Below the 1.5960 area suggests a stronger move towards the September lows at 1.5820.
It needs a move above resistance and last month?s high at 1.6310 to target a move towards 1.6590, last years August high.
EURGBP ? the single currency continues to gain at the pounds expense approaching its highest levels since early May. Resistance now comes in at 0.8200, the May highs while behind that 0.8265 is 38.2% of the down move from the 2011 high at 0.9085.
The break of the 200 day MA last week has shifted to bias to a more positive one with support at 0.8110 and behind that at 0.8070.
USDJPY ? yesterday?s break above the 200 day MA and the August highs, brings the June highs at 80.60 into view. We need to close above 79.80 on the week to open up a move to 81.00 which is the top of the weekly cloud.
To sustain this move higher any pullbacks need to hold above the 79.20 area, otherwise we could well see a fall back towards 78.50.
Equity market calls
FTSE100 is expected to open 9 points higher at 5,892
DAX is expected to open 12 points higher at 7,340
CAC40 is expected to open unchanged at 3,483