Can markets maintain Draghi effect
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
A lot of column inches are likely to be devoted between now and next week?s ECB rate meeting to an interpretation of what ECB President Mario Draghi meant when he pledged to do ?whatever it takes to preserve the euro? and that ?believe me it would be enough?. While it lacks the impact of ?I?ll be back?, it certainly had the desired response on financial markets, sending Spanish and Italian bondyields sharply lower, easing some of the pressure on Spain specifically, as yields dropped back below 7%.
Particular attention was focussed on the statement that addressing high yields on sovereign debt in the euro area comes within the central bank’s mandate, and this primarily helped reinforce the rebound in sentiment.
It gave the impression that the ECB stands prepared to do something about capping rising peripheral bond yields, with interpretations ranging from a restart of the dormant SMP program to giving the ESM a banking licence if, or when, it is ratified by the German constitutional court on 12th September.
As it stands the Securities Markets Program is already at the limit of the ECB?s mandate, but Germany reluctantly went along with it to buy time for vulnerable nations to implement reforms. The piecemeal purchase of Spanish and Italian bonds is one thing, given the size of the bond purchases relative to the size of the European bond market, but to be effective in driving both Italian and Spanish yields down the ECB would have to go ?all in?, given that the Italian bond market is the third largest bond market in the world.
Given investors? fears of subordination after the Greek PSI the ECB could find themselves on the end of a bond rush as investors seize the opportunity to unload their holdings en masse to the only available buyer.
It would seem unlikely that Germany would countenance any of these measures in any way, and for that reason caution remains the watchword.
Nevertheless, attention will now inevitably shift the focus towards next week’s ECB rate meeting to see if Mr Draghi?s deeds match his rhetoric, or whether he is simply trying to buy more time for when the ESM becomes available.
As a timely reminder as to why investors are so worried about Spain?s economic position the publication of the latest unemploymentdata is expected to illustrate just how big a hole the Spanish economy is in. The June figure is expected to rise to 24.7%, from 24.4%.
Meanwhile, bubbling away in Athens the Greek government is looking at further ways to save ?12bn over the next two years to convince the troika it deserves the next tranche of bailout money.
After this week?s rather disappointing US economic data attention will be closely fixed on the release of the latest US Q2 GDP numbers, with expectations of a fall from the 1.9% reading in Q1 to 1.5% in Q2.
If the number comes in anywhere under 1.4% then you can expect further speculation about what actions the Fed might take with respect to further accommodation at next week?s FOMC meeting.
EURUSD ? the bullish candle on Tuesday gave us an early warning of a potential rally. Yesterday?s break above the 1.2170 level sure enough saw a rally back to 1.2300 and the trend line resistance through the highs from the 10th July at 1.2315. This is capping any gains for now and while it does we can expect to see the euro drift back down again. A break above here has the potential to target a move back to the 55 day MA at 1.2485.
A monthly close below 1.2150 is likely to be the catalyst for a move lower though we should also be aware that the 200 month MA comes in at 1.2060, near this weeks low.
GBPUSD ? yesterday?s rebound once again stopped shy of the 200 day MA at 1.5747 and this keeps the onus on a continuation of the recent range. This region also coincides with June and July highs so is important resistance in order to prevent a break towards 1.5910.
There is trend line support at 1.5440 from the 1.5270 lows and this could conceivably hold any further downside pressure.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? yesterday?s move highs didn?t made much progress beyond 0.7860, well short of the 0.7880 resistance level. The support at 0.7820 is holding for now and while it does we can expect to see this range to remain. A move above 0.7880 would then target a retest of the 0.8000 level and 55 day MA.
A break below the October 2008 lows at 0.7695 could well see a test of the 2008 lows at 0.7390.
USDJPY ? yesterday?s volatility had virtually no effect on the yen as the US dollar continues to hold well above the 77.60 May lows and the base of the weekly cloud. As long as this 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 27 points higher at 5,600
DAX is expected to open 25 points higher at 6,608
CAC40 is expected to open 8 points higher at 3,215
FTSEMib is expected to open 77 points higher at 13,287