Italian bond auction a key test as Jackson Hole looms
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
In Europe the main focus is likely to be on this morning?s Italian auction of ?6.5bn of 5 and 10 year bonds especially after yesterday?s much better than expected T-Bill auction saw yields drop sharply.
Italian yields on the longer end of the curve continue to remain elevated despite Draghi?s insistence yesterday in an op-ed to a German newspaper that the ECB was justified in using ?exceptional measures? as part of its mandate of price stability.
The ECB?s President?s absence from the Jackson Hole Symposium, which starts today, along with every other ECB council member has fuelled expectation that the ECB is working on a comprehensive plan to deal with elevated bond yields, however the fact that the focus will be on the short end of the curve is likely to see yields remain high beyond 2 year maturities. This remains a problem, particularly for Italy, which has around ?29bn of redemptions in September. Any proposed plans are likely to run into criticism from the German Bundesbank who remain opposed to such measures.
Europe certainly needs something from the ECB as politicians continue to be unable to deliver any solid solution or roadmap, with consumer confidence in Europe for August expected to remain weak at -24.6, and a whole series of related confidence indicators also set to show continued weakness.
In Germany the latest unemployment numbers for August are expected to show that the German economy, despite the economic slowdown in Europe, remains largely unaffected with the rate set to stay at 6.8% and a month on month rise of 7k.
In the UK the Bank of England will be hoping that its latest slug of QE as well as its new funding for lending program will have the required effect on the money supply figures. M4 for June slipped 1.4% and 5.2% year on year and MPC members will be hoping for a significant improvement in order to justify the recent addition of new stimulus measures.
Mortgage approvals are also expected to rise from 44.2k in June to 47k in July which consumer credit and net lending is expected to increase by £0.5bn.
If investors were looking for clues as to what Fed Chairman Ben Bernanke might say at Jackson Hole this week with respect to the US economy, then yesterday?s Beige Book and US GDP revision are unlikely to have provided it.
If anything the data highlighted the patchy nature of the recovery in certain parts of the US economy, with 9 districts posting modest or moderate growth, though the manufacturing sector was a concern. It seems increasingly likely that markets might have to lower their expectations somewhat, especially in view of the fact that we may well see further improvements in next week?s ADP and non-farms payrolls data.
Another factor worth considering is the current level of the oil price, which is near two month highs, given that further QE would likely send it even higher. It would be rather daft to talk about tapping strategic oil reserves to cap prices and then embark on further QE which would negate the effects of an SPR release.
EURUSD ? the continued failure to overcome the 100 day MA, now at 1.2600, suggests we could well see a pullback towards the 1.2420 area. Only a break of 1.2615 targets the June highs at 1.2750.
To reopen the downside primary trend line support at 1.2380, from the 1.2045 lows needs to be broken.
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 ? the failure to push through last week?s highs at 0.7965 has seen the euro slip back, posting a bearish engulfing candle pattern on the daily charts in the process and closing below back below the 55 day MA in the process.
The main support remains at the 0.7880 level with a break back below retargeting the 0.7820 area.
This area remains the key barrier to a test of the downside and previous lows at 0.7755.
The failure to sustain a close above the 55 day MA suggests that we could struggle to retest the 0.8005 level, which is resistance from last October?s highs at 0.8830.
USDJPY ? the dollar is currently struggling between two converging trend lines, one at 79.50 on the upside and one at 78.06 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 17 points lower at 5,727
DAX is expected to open 32 points lower at 6,979
CAC40 is expected to open 13 points lower at 3,401
FTSEMib is expected to open 33 points lower at 14,911