EU Summit begins as political tensions rise
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
If Italy and Spain were hoping for a softening of position from German Chancellor Angela Merkel prior to the start of today’s EU Summit they were sadly disappointed yesterday.
If anything the German Chancellor appears to be tiring of being constantly blamed for the ills of the European continent and as such it would appear that positions are now starting to become entrenched.
Financial markets are hoping that EU leaders will be able to come to some form of agreement about steps towards some form of banking union and a deposit guarantee scheme, as well as agree to measures to help lower borrowing costs in Spain and Italy.
Expectations are low so the potential for a positive surprise is there; unfortunately it seems more likely that nothing tangible is likely to be agreed given that EU officials are already playing down expectations.
A plea by Spanish PM Mariano Rajoy for the ECB to be unleashed to lower Spain’s borrowing costs, or for the bailout fund to be allowed to buy bonds directly, fell on deaf ears, while Italian PM Monti pledged to work through until Sunday night to get some measures announced that would lower borrowing costs.
Italian PM Mario Monti is especially concerned at the rise in borrowing costs given that today Italy has yet another 10 year bond auction. The last auction yielded 6.03% with a bid to cover of 1.4 and it seems likely that today’s auction will yield higher than that.
It could be argued that they haven’t been helped by the position and actions of French President Hollande who as a cheerleader for having Eurobonds then proceeded to go off message and reduce the retirement age for some French workers back to 60, as well as raise the minimum wage, while at the same time urging Germany to sign a blank cheque to keep the euro together, while their workers retire at 67. That’s a hard sell to make in any language, but especially in Germany, a year before an election.
Such actions send a message to Germany and other more fiscally responsible governments that when all is said and done governments will always do what is politically expedient at a local level rather than make painful decisions, and is behind Germany’s position to insist on strong centralised control of budgets, before one cent is made available. It’s all the more difficult when the German economy is only feeling a light breeze as opposed to a chill wind, with an unemployment rate for June expected to be confirmed today at 6.7%.
In ordinary times the small matter of UK GDP could well be a big deal, but we don’t live in ordinary times at the moment and today’s final Q1 number is likely to be of secondary interest to markets despite the fact that the numbers are likely to confirm a contraction of 0.3%.
With gilt yields near historic lows, the fact that the UK has control of its own central bank and monetary policy makes it a relative safe haven from events in Europe, on a fiscal level, if not an economic one.
US Q1 GDP is also expected to be confirmed at 1.9%, while weekly jobless claims are expected to remain around the 386k mark.
EURUSD – the 1.2430/40 support area continues to hold for now as pressure builds 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 – the concern expressed yesterday about the lack of follow through in the topside proved well founded as the pound slipped back below 1.5620 and subsequently retested the 1.5540 level.
Downside risk remains the predominant theme here and we could well be heading back to the 1.5470/80 level and 14th and 15th June lows.
The 1.5620 level once again becomes resistance for a move back 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.
Only a close beyond 1.5755 the 200 day MA, targets 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move.
EURGBP – the area below the 0.8000 level seems to be offering quite a bit of support at the moment, however the key level remains the 0.7950 area. As long as any pullbacks stay below the 55 day MA and trend line resistance from the highs this year at 0.8505 continues at 0.8105, then further euro losses are the preferred scenario.
Once below 0.7950 we could well see a move towards 0.7845 and the November 2008 lows.
The key resistance remains at this months highs at 0.8150 and is the main obstacle to a move towards 0.8170, 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 79.35 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 sustained 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 12 points higher at 5,536
DAX is expected to open 5 points higher at 6,234
CAC40 is expected to open 9 points higher at 3,072
FTSEMib is expected to open 18 points higher at 13,322