Moody?s puts Germany on negative watch
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Last night?s decision by Moody?s to place Germany, Luxembourg and the Netherlands on ratings watch negative put the icing on the cake of another turbulent day in financial markets yesterday.
In joining Austria and France on a negative outlook the action leaves Finland as the only European nation with a stable outlook. The reason Finland appears to have escaped is due to its insistence on collateral in exchange for aid. This could well see other countries start to demand collateral as well which could well complicate the swift disbursement of future bailout funds.
The decision by the agency was based on the increased likelihood that Greece could well leave the euro area, along with an increased risk that in the event of further deterioration in economic conditions, further collective support could well be required with the increase in contingent liabilities that would entail from that. The Troika is also due to arrive in Athens today to assess how far Greece is missing its fiscal targets.
These concerns increased significantly yesterday after Spanish bond yields spiked sharply across the yield curve as investors fretted about the ability of Spain to be able to fund itself as economic conditions continued to show sharp deterioration in the country. It now seems likely that the country could well need a sovereign bailout to go with its banking one, despite political protestations to the contrary.
The rationale behind these fears were underscored by the latest 0.4% GDP contraction for Q2, along with the expectation that all 17 Spanish regions could well need further support, as well as the absence of any coherent political response, which has seen investors pull back to the side-lines.
Today?s Spanish 3 and 6 month T-Bill auction is likely to highlight Spain?s difficulties quite starkly with an expectation of higher yields and lower bid to covers. If the auction goes badly then pressure for Spain to ask for bailout is likely to increase, which in turn will then see investors turn to Italy which has also seen its borrowing costs rise in tandem with Spain?s.
It would appear unlikely that the latest economic data due out this morning could bring any optimism given concerns about the slowdown in economic activity across Europe. The latest July manufacturing and services PMI data for France and Germany and the broader Eurozone is expected to remain sharply in contraction territory.
There was some good news earlier this morning from China when HSBC Manufacturing PMI data for July unexpectedly improved from a previous reading of 48.2 to 49.5, as some of the easing measures recently implemented start to filter down, which could well give some boost to the commodities sector on the European open.
EURUSD ? the single currency dropped sharply lower yesterday finding some support at 1.2070 before rebounding. A small doji on the daily candle chart suggests a risk of a rebound back towards the gap between 1.2140 and Friday?s close at 1.2160. A move through 1.2170 could well see a move towards the 1.2300 level. Only a break above this level targets 1.2520 the 55 day MA.
The longer term target remains for a move to 1.1880 and the 2010 post Greek bailout lows, and a monthly close below 1.2150 could well be the catalyst for that.
GBPUSD ? the predominant range remains likely to hold sway here with resistance near the 200 day MA though Friday?s bearish daily candle reinforces the case for a test towards the recent range lows.
To target a move towards 1.5910 we would need to see a close above the 200 day MA.
Support remains around this month?s low at 1.5395, and then this years low at 1.5240.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? another 4 year low yesterday at 0.7755 prompted a sharp rebound in the single currency, posting a bullish daily reversal candle in the process, which could spell the beginnings of a short term turnaround.
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.
A break below the October 2008 lows at 0.7695 could well see a test of the 2008 lows at 0.7390.
USDJPY ? the reversal seen off the 77.95 level yesterday saw the US dollar pull back sharply with a potential bullish daily candle.
As long as the May low at 77.60 and the base of the weekly cloud holds the downside the risk of a rebound remains quite high.
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 19 points higher at 5,553
DAX is expected to open 19 points lower at 6,400
CAC40 is expected to open 7 points higher at 3,108
FTSEMib is expected to open 23 points higher at 12,729