Spanish stress tests and French budget due
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Yesterday?s much anticipated Spanish budget saw Spanish leaders announce that they would be looking to cut spending by ?40bn in 2013. The budget also aimed to implement a whole host of reforms, including a budgetary oversight committee to oversee government spending.
Plans were also announced to introduce 43 new laws over the next six months which should keep the lawyers busy, while enacting a new tax on gambling of 20%, and revamping capital gains tax to cut speculation as well as enacting a tax on lottery winnings over ?2,500.
While the jury remains out on how effective these revenue predictions will be, the GDP projections remained fairly unrealistic, with projections that this year?s budget deficit would come in on target at 6.3% of GDP, which doesn?t really square with the Bank of Spain?s assessment of the Spanish economy earlier this week.
It now remains to be seen whether or not the Spanish government has done enough to convince EU leaders that they have done enough, so that when they do ask for a bailout, no new measures are imposed on them in return for the ECB?s help in keeping their borrowing costs down.
For all the Spanish governments financial jiggery pokery in putting yesterday?s budget together, today?s publication of the Wyman stress test report on Spanish banks which could well blow all of the carefully crafted calculations out of the water, if the numbers come in at the high end of expectations.
Estimates vary, but the expectation is that the report will show that an injection of ?60bn would be needed, which some in markets believe is likely to be nowhere near enough, given this week?s increase in non-performing loans to around ?170bn.
Once these events are out of the way the ball will once again reside in the court of Prime Minister Rajoy, conspicuous by his absence at yesterday?s press conference, as to the timing of any bailout request. It will also open the way for the anticipated announcement from Moody?s regarding Spain?s credit rating, which is due any day now.
Also due today is the latest French budget which will be a key test of President Hollande?s mettle after this week?s disappointing unemployment numbers. Monsieur Hollande will somehow have to plug a ?30bn budget hole against a backdrop of two successive quarters of stagnant growth, while at the same time keeping all his spending promises to get elected. The likelihood is he will go for tax increases with a 75% income tax on +?1m earners, which could well be counterproductive.
EURUSD ? once again the single currency managed to hold above the 200 day MA at 1.2830, rebounding from that level yesterday.
It needs a push below 1.2830 to retarget the 1.2650 level with key trend line support from the 1.2045 lows now at 1.2635.
Yesterday?s pullback could well extend back to 1.3020 given the slightly bullish daily candle.
The bigger trend line resistance level remains from the 1.4940 highs at 1.3200
Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD ? cable continues to trade in the range between support at 1.6140/50 and the larger resistance at 1.6300/10. The risk remains for a move back towards trend line support at 1.6050 from the August lows at 1.5490, targeting 1.5920.
It needs a move above resistance at 1.6305 to target a move towards 1.6590, last years August high.
Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5630 from the 1.5240 lows.
EURGBP ? another lower low yesterday at 0.7925 keeps us on course towards the 0.7880 level via trend line support from the 0.7755 lows at 0.7905. Pullbacks should find resistance around the 0.7980 level.
To restore upward momentum we need to see a bounce back through the 0.8050 area to retarget the highs two weeks ago.
USDJPY ? the continued inability to rally back through 78.00 keeps the pressure on for a move towards the lows earlier this month at 77.25.
To stabilise in any meaningful way we need to take out trend line resistance at 78.95 from the 20 April highs at 81.80, as well as the 200 day MA at 79.32. The 200 day MA at 79.32 remains the main obstacle to a return towards the highs last month at 79.70.
Equity market calls
FTSE100 is expected to open 21 points high at 5,800
DAX is expected to open 46 points higher at 7,336
CAC40 is expected to open 21 points higher at 3,460