Spain expected to formally request bank aid
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The focus once again remains on events in Europe this week with the key EU summit the focus of event?s this week. As far as today is concerned Spain is expected to formally apply for its long awaited banking bailout, according to its finance minister at the end of last week. The independent preliminary report from consultancy Oliver Wyman suggested that the Spanish banks could need as little as ?62bn in an adverse scenario, a lot less than the original ?100bn bailout approved well over a week ago.
Given that economic activity in Spain remains muted, with rising unemployment and non- performing loans at a 20 year high, it seems likely that this so called adverse ?62bn figure could well rise rapidly. In any case this lower than expected figure caused Spanish bond yields to slide back from their highest levels of the week but they still remain eye-wateringly high.
Furthermore uncertainty remains as to how the bailout will be applied and under what conditions, due to disagreements amongst EU leaders as to how the Spanish bank sector should be restructured.
Today?s meeting of ECB President Mario Draghi and French President Hollande could well be a rather short one, with the latter asking the central bank President to ease monetary policy and restart the SMP, while Draghi is expected the French President to stop dragging his feet and work on a fiscal and banking union.
As it is the ECB incurred the wrath of the German Bundesbank at the end of last week by relaxing collateral rules to include auto loans, consumer finance and other mortgage backed securities, in an attempt to ease stresses in the funding markets. This lowering of requirements could raise the question of whether the ECB could be paving the way for another LTRO.
In Greece the focus remains on how the new government will embark on its new relationship with the EU and the troika. The new government has already pleaded for an easing of some of the bailout conditions including the suspending layoffs and tax rises, plus a two year extension to cut its budget deficit to 2.1% of GDP to 2016.
This appears to have gotten short shrift from German finance minister Schaeuble, who insisted that Greece needed to get the program up and running.
The troika of the ECB, IMF and EU were due to visit Athens today, to assess how far Greece had fallen behind its program due to the elections; however the visit has been postponed after both new PM Samaras and finance minister Rapanos were both taken ill at the end of last week.
Last week?s four leader summit in Rome between Italy, Spain, France and Germany agreed on a growth package of ?130bn, or 1% of euro GDP, which would be discussed at this week’s EU summit?s but it was light on detail. Any hopes that Italy?s Monti, Spain?s Rajoy and France?s Hollande had of persuading German Chancellor Angela Merkel of bowing to pressure for mutualisation of banking debts and Eurobonds were soon dashed as she remained steadfast in her opposition to them.
EURUSD ? stuck in the range between the 1.2750 resistance area and the support between 1.2430/40.
While below 1.2620 preference remains for a move back to the lower end of the range. A break below 1.2430 retargets the lows at the 1.2290 area.
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 ? last week?s failure to close above the 200 day MA at 1.5755 keeps the pressure on the downside. The failure at 1.5780 was a key level given it was the 50% retracement of the entire down move from the 1.6305 highs in April to the 1.5270 lows in June.
While below 1.5620 the next target remains the broader support at the 1.5470/80 area, which is the 14th and 15th June lows.
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.
EURGBP ? we remain stuck between two converging trend lines with trend line support from the recent lows at 0.7950, at the 0.8005 level which continues to limit the downside here.
The 55 day MA and trend line resistance from the highs this year at 0.8505 continues to act as a cap on the upside at 0.8105.
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.
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 ? we closed on the cusp of the cloud at 80.43 in New York last week but a turn to the upside seems premature to call at the moment. The US dollar needs to hold above the 79.80 level to keep the bias to the upside. Last week?s close above the 55 day MA is a positive but we also need to stay above the 200 day MA at 78.80.
This makes this weeks close even more important and a strong close above the cloud is needed to reboot the bullish US dollar scenario.
Equity market calls
FTSE100 is expected to open unchanged at 5,514
DAX is expected to open 23 points lower at 6,240
CAC40 is expected to open 9 points lower at 3,082
FTSEMib is expected to open 42 points lower at 13,621