Regional defiance pressures Spain, ahead of US GDP
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The market calm before the September storm looks set to continue today, despite on-going concerns about the condition of the global economy, from Europe, China and the US. Markets continue to bet on concerted intervention from the Federal Reserve, European Central Bank and the Bank of England into year end, in an attempt to try and resurrect demand.
Yesterday?s confirmation of a steeper contraction in Spanish GDP to -0.4% merely confirms the grave state of that beleaguered country?s finances.
The news that the region of Catalonia intends to follow in the footsteps of its smaller counterparts in Valencia and Murcia in asking for ?5bn from the soon to be created state liquidity facility, merely serves to highlight the high stakes being played for across Europe, especially when the region insists it won?t accept, or comply, with any conditions for the aid it gets.
This refusal to accept conditions, by one of Spain?s bigger regions from its own central government starkly illustrates the challenge facing Europe?s leaders when constructing a future bailout package for Spain, when it gets around to asking for one.
If the Spanish government can?t influence its own regions now, then what chance would any EU oversight committee or troika have in doing so in the event the Spanish government follows up its banking bailout request with a sovereign bailout request, which it surely will, given its failure to control its region?s spending.
It would appear that investors share some of these concerns if deposit outflows from Spanish banks are any guide. In July the net deposit outflows from Spanish banks increased to ?74bn, well above the previous highest level.
These tensions are likely to be behind ECB President Draghi?s decision to forego his first trip to Wyoming and Jackson Hole, with some commentators speculating that this means that something big is in the works, which is probably overstating it somewhat.
The reasons cited are a heavy workload, which is probably the understatement of the year, given that Europe remains teetering over a hole of its own. The one it seems determined to dig itself further into.
The health of the US economy will once again be at the forefront of markets focus today ahead of this week?s Jackson Hole symposium and the expectation that the Fed Chairman will fire the starting gun on another round of easing and asset purchases to help kick start the US economy. Yesterday?s disappointing July US consumer confidence numbers could well reinforce that belief, however the market could well be getting a little ahead of itself, especially with the latest release of US Q2 GDP due to be revised up from 1.5% to 1.7% after some improvements in some of the most recent US economic data.
Despite last week?s particularly dovish FOMC minutes, investors appear to be overlooking some of the better data seen post these minutes and given that jobs growth in the twelve months to date in the US economy has been 70% above the same period the year before, it is not immediately apparent what justification Mr Bernanke could have for such measures given that the Dow and S&P500 are just below 4 year highs.
EURUSD ? the single currency continues to struggle just shy of the 100 day MA, now at 1.2600.
Until there is enough momentum to overcome this barrier then the risk of pullbacks towards the 1.2420 area remains. To reopen the downside primary trend line support at 1.2370, from the 1.2045 lows needs to be broken.
Only a break of 1.2615 targets the June highs at 1.2750.
The key level on a monthly close remains the 200 month MA at 1.2060.
GBPUSD ? the key level on the upside remains at 1.5910, the 61.8% retracement of the 1.6305/1.5270 down move, and while unable to break through here the cable remains at risk of sliding back towards last week?s lows at 1.5675. Only a break above 1.5910 brings the 1.6000 level back into play.
The long term trend line support lies at 1.5535 from the 1.5240 lows.
EURGBP ? yesterday?s close above the 55 day MA for the first time since March could herald further gains but we really need to see it push through last week?s high at 0.7965 first, before we can look at a test of the 0.8005 level which is resistance from last October?s highs at 0.8830.
The 0.7880 area should continue to act as support on any pullbacks. Only a break back below retargets the 0.7820 area.
This area remains the key barrier to a test of the downside and previous lows at 0.7755.
USDJPY ? the dollar is currently struggling between two converging trend lines, one at 79.55 on the upside and one at 78.05 on the downside continuing to remain susceptible to easing speculation ahead of this week?s Jackson Hole symposium. Resistance remains at 78.80 and above that at the 200 day MA at 79.27 which needs to be overcome to target a return towards the highs last week.
While below 78.80 now the risk of a move back to the range and August lows at 77.80 remains. The key weekly cloud support remains at 77.30.
Equity market calls
FTSE100 is expected to open 7 points lower at 5,769
DAX is expected to open 10 points higher at 7,013
CAC40 is expected to open 10 points higher at 3,442
FTSEMib is expected to open 21 points higher at 15,014