Markets continue to drift ahead of EU Summit
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
This week?s EU summit continues to act as a cloud over markets with expectations getting lower by the day. Yesterday?s events did nothing to change the mood of prevailing pessimism, especially after German Chancellor Angela Merkel was reported to have ruled out any idea of jointly guaranteed eurozone debt for „as long as I live“, and thus ruling out any notion that we would see a step towards Eurobonds at this week?s summit.
These comments were reportedly made to a closed meeting of her coalition partners so we shall have to wait and see if these comments are nuanced later today, when she speaks to the German lower house, ahead of her meeting with French President Francois Hollande, however the comments don?t leave much room for manoeuvre.
The German Chancellor is reportedly not happy with a document published by Herman Van Rompuy, European Council President, outlining a plan towards banking and fiscal union within the Eurozone stating that there was not enough focus on controls on how any money is distributed.
Mrs Merkel?s stance certainly doesn?t make Italian Prime Minister Mario Monti?s job any easier, where he is coming under pressure at home, as Italy?s borrowing costs continue to rise on fears about its own banking system.
This is as result of yesterday?s action by the Italian government in buying ?2bn of bonds from its oldest bank, Monte di Paschi in an attempt to shore up its tier 1 capital ratio. This has reinforced concerns about the toxic and symbiotic link between banks and the sovereigns that have seen Spain succumb to a banking bailout, raising concerns it could well be the tip of the iceberg in Italy as well as Spain.
In a sign of the tensions Mr Monti is under he was forced to deny reports that he had threatened to resign over his and other EU leader?s failure to convince the German Chancellor of pushing ahead with the Eurobond idea. The Italian PM is under pressure in Italy as his reform program has stalled and former PM Berlusconi is making noises that it wouldn?t necessarily be a bad thing if Italy left the euro.
Economic data out today includes German CPI numbers and given the recent sharp declines in commodity prices a low reading is likely to raise expectations of an ECB rate cut next week. June CPI on a monthly basis is expected to show a -0.2% reading lowering the year on year reading to 2.1%. Import prices are also expected to slide 0.6%
US durable goods for May are expected to rise 0.5%, up from a flat reading in April as worries persist about the sustainability if the US economic recovery.
EURUSD ? yesterday?s test of the 1.2430/40 support area keeps the pressure on the downside. Short squeezes should be restricted to the 1.2620 area, while there is also resistance at the 1.2530 area. a break below the 1.2430 area opens up a test towards the lower end of the recent range at 1.2290.
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 ? yesterday?s push above the 1.5620 area suggests we could well see a retest towards the 200 day MA at 1.5755 which remains the major resistance, as well as trend line resistance from the 1.6305 highs at 1.5730. Given the lack of follow through on the upside there is a risk of a fall back below 1.5620 towards 1.5540. The key support lies at the 1.5470/80 level; the 14th and 15th June lows.
A close beyond 1.5755 the 200 day MA, through 1.5780, targets 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move.
EURGBP ? yesterday?s down move in the euro pushed below trend line support from the recent lows at 0.7950, and now retargets those same lows. Below 0.7950 could well see a move towards 0.7845 and the November 2008 lows.
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.
USDJPY ? the fall in the US dollar has so far held above trend line support at 79.25 from the 77.60 lows in June. We need to stay above the 200 day MA at 78.80 to keep the current upward bias intact.
A move back above 79.80 is required to stabilise and retest the cloud resistance at 80.43.
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 25 points higher at 5,472
DAX is expected to open 37 points higher at 6,174
CAC40 is expected to open 15 points higher at 3,028
FTSEMib is expected to open 84 points higher at 13,052