One day down 4 to go this week and the tension is building in markets as the euphoria of last week gives way to a little uncertainty about whether or not and when the ECB can start buying Spanish bonds. European equities were stronger but elsewhere the euphoria faded as markets await the FOMC and ECB later this week.
You are not supposed to go to the brink unless you know you are going to make the other bloke blink or you have nothing left to lose - the stakes are just too high when you play the nuclear card. I'm not sure either of these conditions is satisfied at the moment for Europe yet ECB President Mario Draghi for whatever reason decided to play the nuclear card last week. He got the result he wanted with pressure coming off Spanish and Italian bonds and the weak stock performance reversing but the stakes are very high now and failure to deliver could be catastrophic even as success will push asset markets sharply higher. The risks to me seem somewhat asymmetric though.
Clearly the Americans are worried also about what is going on in Europe at the moment and Mario Draghi's brinkmanship because the stakes are also very high for the Obama administration in an election year where the US recovery, and thus job creation, has clearly been blindsided by the European economic malaise and politicial intransigence. So US Treasury Secretary Geithner was on the hustings in Europe talking to the key players including Draghi and German Finance Minister Schauble no doubt trying to aid Draghi's plan for shock and awe and bond buying. But the German's seem yet to be convinced that the buying of bonds sends the "right incentives" to the besieged and profligate southern states.
Yet stocks in Europe rallied even in the face of weaker data in the Euro zone. Spanish Q2 GDP was down 0.4% as the Spanish economy continues to struggle under the weight of austerity and 23%+ unemployment. Elsewhere in Europe the European Commission released the economic sentiment indicator which showed a fall for the fourth month in a row down to 87.9 from 89.9 previously. Manufacturing data contained in the quarterly version of the survey showed utilisation fell to 77.8% from 79.7% in April and exports are expected to fall with this index dropping to -0.8 in July from 2.6 in April and 9.2 a year ago. Not good by any stretch and Draghi's shock and awe better eventuate or he might just have killed the Euro project with his brinkmanship.
Yet at the close of play European stock markets were far more ebullient than the concern shown elsewhere and posted a very positive session. The FTSE was up 1.18%, the DAX rose 1.27% and the CAC was up 1.24%. Madrid had another cracker rising 2.67%. Across the Atlantic though things were not so excited or exciting with market basically unchanged. The Dow fell marginally-0.02% to 13,073 with the S&P down 0.05% to 1,385 and the NASDAQ down 0.41% to 2,945. Data in the US though was weak with the Dallas Fed Manufacturing survey missing by a very long way dropping to -13.2 from 5.8 a month ago.
In commodity markets the CRB was up 2.9 points to 302.50 with Gas and the grains through the roof again. Natural gas on the Nymex exchange rose 5.81% apparently on the back of forecasts of more heat waves and thus increased demand for electricity fired by gas. It closed at a high for the year so it could equally be spec money piling in as well. The heatwave also buoyed the grains and the crop is looking worse by the day. At the close of play corn was up 2.55%, wheat up 1.8% and soybeans up 2.54% - all the foods were up overnight. Crude fell 0.69% however even as the production data showed a better supply demand balance is emerging in the market for H2 2012.
On FX markets it was a night of consolidation even though the Euro didn't share the excitement of European bourses and slid back to a low of 1.2249. It's sitting at 1.2261 as I write which is really only off 0.5% on the day so not too bad. The Australian dollar is up marginally and sits at 1.0499 at the moment and is the best performing of the G10 currencies (non-US) overnight. The pound was a little lower and sits at 1.5708 presently.
Lets have a look at some of the markets we follow using our AVATrade trading platform charts.
EUR/USD: The Euro fell through 1.2280 but we only got a 30 point fall not a 50 point fall with the low being 1.2249 before it recovered a little as you can see below on the 4 hour chart. It looks like on the day Euro should find support on the trend line which has quite a few touches on the hourly charts and comes in at 1.2240 today - perhaps a move back toward 1.23
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AUD/USD: The AUD continues to grind higher and pushed through 1.05 overnight. It is now through 1.0475 which was the 100% retracement of the run that took us all the way down below 0.96 in late May and Early June. If AUD can hold here for a day then 1.0850/60 comes back into view. As I noted yesterday subjectively this does not feel right but who can argue with the price action.
The AUD will pullback it is just a question of when and where from and then where to. 1.0540/50 is the 1.382% extension of the most recent move so this zone seems a reasonable place for a rest.
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GBP/USD: A day of consolidation for GBP under the key 1.05765/75 making a low of 1.5680 before recovering back above 1.5705. The topside level it the key to a break toward 1.62 but remains a range top at the moment and thus formidable resistance. Like the Euro GBP might have a better day todya and run toward 1.5740ish. Support is 1.5680 then 1.5660/65.
USD/JPY: Tiny ranges remain the order of the week and month for USD/JPY even if it has had a downside bias for the past 6 weeks. 77.90/78.00 is key downside support with 78.70 resistance.
EUR/JPY: We thought EUR/JPY was overdone yesterday but that 95.50 would be solid short term support. That was how things transpired and this level remains key short term support. On the day looking for quiet trade unless this level gives way.
DATA: Another huge day of data today with the local highlight the release of Private Sector Credit, new home sales and then also Building approvals. there is a raft of secondary data in Europe and some personal income data in the US before the headline for me which is the Chicago PMI and Milwaukee NAPM.
Written by Greg McKenna for AVAFX on behalf of Macro Investor
