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As hopes that Spain will manage without a bailout are all but fizzling out, the downgrading of seven Danish banks last night by Moody’s will only add to the already negative market sentiment today.
 
Opinion polls on the Greek elections are almost becoming a side show to the main event as concerns about the extent of the solvency of the banking system saw markets push Spanish borrowing costs closer to the bailout zone of 7%. With a clear stalemate between the ECB and the Spanish PM, one has to question whether there is the capacity to rescue a country which has an economy double the size of Greece, Portugal and Ireland combined.
 
The Irish will take to the voting booths today to ratify the Fiscal Compact Treaty, where it’s hoped that a ‘Yes’ vote will enable tapping of the as-yet uncertain ESM fund should bond markets remain too hot to handle. 
 
With many posturing that Spain’s bailout costs could be as high as €350 billion, and the contagion spreading to Italy, one has to wonder just how much cash would be actually be available from the $500bn pot should Ireland need a further bailout in late 2013.
 
ECB President Mario Draghi is due to speak at the European Policy Council in Brussels later this morning where any response or comment on the on-going European meltdown will be of intense interest to the markets.
 
In economic news, a plethora of data is due with German Retail sales expected to see a mild increase owing to better weather conditions. Following last month’s concerning rise to 19k, Germany’s unemployment change is expected to show a drop back to 7K.

The CPI Flash estimate will likely show that inflation is still above the target of 2%, with consensus expecting a small pull back to 2.5%. Anything higher than this will more than likely mean that the ECB will hold back on any rate decision next week, particularly in light of the potential shock of a Greek exit next month.
 
Stateside, unemployment claims are expected to fall back to 369k, while the GDP quarterly figure will probably see a pull back towards 1.9%. The ADP Employment change may give some clue regarding the bigger Non-Farm number on Friday, with the monthly change of employed expected to rise by 20k from April’s 139K.
 
With numerous black swans gathering in Europe only a shockingly bad number on Friday would see any intervention from the Fed.
 
EURUSD – the Euro is in its 5th successive week of decline against the greenback and continues to track lower breaking below the 1.2500 and the 1.2400 levels in jig time for the first time since July 2010. The key resistance remains at the 1.2620/30 level put in on Monday. This resistance needs to hold to prevent a short squeeze towards last week’s highs at 1.2820/30. The 2010 post first Greek bailout lows at 1.1880, remain a distinct possibility though we might find some support around the June 2010 lows at 1.2150.
 
GBPUSD – Dollar strength has pushed Sterling though the key 1.5530 and 1.5500 levels in quick succession, areas which will now likely act as barriers to upside.  A fall below 1.5415 should eventually see a return towards this year’s low at 1.5230. The larger resistance remains at the 1.5840/50 level which proved to be such a strong barrier last week.
 
EURGBP – the range trade between resistance around 0.8040 and support around 0.7980 continues, with the single currency finding the air quite thin above the 0.80 area. Any pullbacks should be capped around 0.8100. Key support level remains at the 0.7950 lows of this month. If we break below the lows at 0.7950 then a slide towards 0.7845 and the November 2008 lows is very much on the cards.
 
USDJPY – the downside pressure on the US dollar has seen the 79.00 support level give way making the 200 day MA at 78.60 a very possible target. The risk remains for further declines towards 78.30 which is the top end of the November/February trading range. Only a close above the 80.42 cloud line would suggest a stabilisation in the dollar.

Equity markets have had another awful day today, despite calls from the EU suggesting that they could "envisage" direct recapitalisations of European banks, which did prompt a sharp rebound midway through the trading day. Once markets had digested this and realised that this wasn't anything that hadn't been suggested before and was opposed by Germany, markets once again slipped back.

A poor Italian bond auction and worse than expected European economic business confidence data continues to weigh on sentiment as Spanish and Italian bond yields continue to rise, with Spanish 10 year yields almost touching their 2011 levels above 6.7%.

A new opinion poll in Greece putting Syriza well ahead of New Democracy has also weighed on investor sentiment as the initial pop from the weekend poll

German bund yields on the other hand continue to hit record lows, along with U.S. treasury yields and UK gilt yields as investor pile into assets, which are considered safer harbours, from the debt storm unfolding in Europe.

Comments from outgoing Bank of Spain Ordonez that he doesn't know how much the Bankia bailout will end up costing has also weighed on sentiment, as uncertainty continues about the eventual size of any final bailout bill.

The selloff has been broadly based across all sectors with the biggest fallers in the basic resource sector as fears rise about the ability or willingness of the Chinese government to deliver the amount of stimulus markets are hoping for. On the plus side defensive utility Severn Trent (SVT LN) is the outperformer up 2%, after announcing a special dividend.

U.S. markets opened significantly lower this morning reversing yesterday's gains as fears about the crisis in Europe continue to send investors into the so called safe havens of U.S. treasuries, as 10 year yields hit all-time lows.

Stocks in focus include Blackberry owner Research in Motion on expectations it will report a loss for the latest quarter. The company announced it was holding a strategic review. LinkedIn is also in focus after being on the receiving end of a broker upgrade.

Economic data failed to offer much in the way of relief as pending home sales slid sharply in April, declining 5.5%, well below expectations of no change.

The biggest mover today has been the Japanese yen as it pushes beyond the 79.00 level to its highest level since early February. It would appear that the Bank of Japan is completely oblivious to the problems of Japanese exporters as the currency continues to rise.

The U.S. dollar is not too far behind as being the main gainer today as investors flock to the relative safe haven of the greenback and US treasury yields fall to record lows on the 10 year.

The biggest decliner has been the Australian dollar after disappointing April retail sales numbers overnight showed a decline of 0.2%, well below expectations of a 0.2% rise, as concerns about a slowdown in China weighed on spending. With commodities also remaining weak the Canadian and New Zealand dollar have also fallen sharply.

Cyclical commodities have tanked today with crude oil prices falling sharply on both the Brent and WTI measures.

U.S. oil prices have fallen to their lowest levels since mid-October last year at $88 after pending home sales for April slid sharply, while inventory data is expected to show further rises in data due out tomorrow.

Brent prices have also slumped back after economic business confidence data in Europe slumped to a two and a half year low. With the US dollar also attracting capital inflows this is also weighing on the oil price.

Copper prices have slid after Chinese officials played down the prospect of further large scale stimulus measures in the near term falling to their lowest levels this year.

Gold prices are back retesting the lows seen earlier this month, and it is becoming increasingly apparent that if the $1,520 level were to give way we could well see a sharp drop towards $1,450.

Spain’s problems with its banks just got quite a lot bigger last night as the European Central Bank torpedoed any hope that they would accept any sort of round robin financing by way of allowing the Spanish government to inject €19bn of its own bonds into the bank, and then have the bank swap them for cash. The ECB’s reasoning was that doing that would be tantamount to monetary financing of governments, which seems rather strange reasoning given the ECB had already been doing that indirectly in any case with its SMP program.
 
This more or less leaves it at the mercy of the markets as it tries to raise the money it needs to help its banks and its indebted regions. With bond yields already nearing unsustainable levels of 6.5% on the 10 year measure, raising the sort of money required will put its public finances, which are already border line, in an even worse state. Spain can either use its bank restructuring fund (FROB) which does have some available funds or try the treasury route, which at current rates will be extremely expensive.
 
The Spanish government continues to push for the ECB to become a lender of last resort; its argument being that they have implemented all reforms they have been asked and as a result should be treated as a special case apart from Greece, Portugal and Ireland.
 
The ECB appears in no mood to budge on this and while Spanish government officials don’t appear to be bluffing about resisting a bailout and forcing a change of heart, the worry is that neither is the ECB or the EU.
 
Rising yields on Spanish bonds are also having a rather unpleasant slip stream effect on Italian bond yields as well, which is not good news for Italy with a 5 and 10 year bond auction of about €6bn due today, where yields could well rise once more.
 
In the UK today we get the latest M4 money supply figures for April as well as the latest mortgage approvals and consumer credit data for April. Given that last week we saw one of the worst retail sales numbers in quite some time the figures aren’t expected to paint a pretty picture.
 
Expectations for mortgage approvals are expected to be unchanged from the March figure at around 50k, but consumer credit is expected to halve from £0.4bn to £0.2bn, reflecting the weak economic environment last month.
 
M4 money supply showed a 5% decline year on year last month and markets will be looking very closely at April’s numbers given next weeks Bank of England rate meeting. A similarly weak number will raise expectations for further QE at that meeting.
 
Despite last week’s revised GDP numbers and poor retail sales there remains the likelihood that the MPC will refrain from further QE until we get to see how events in Europe play out. Given recent comments from policymakers about the stickiness of inflation, as well as the uncertainty in Europe, the bank may well feel it prudent to hold fire, given that the potential for further shocks remains very high indeed.
 
EURUSD – the Euro continues to track lower breaking below the 1.2500 level for the first time since July 2010 after failing to get back above the 1.2600 level yesterday. The key resistance remains at the 1.2620/30 level put in on Monday. This resistance needs to hold to prevent a short squeeze towards last week’s highs at 1.2820/30. The 2010 post first Greek bailout lows at 1.1880, remain the primary objective and it remains highly likely we will see them, though we might find some support around the June 2010 lows at 1.2150.
 
GBPUSD – the Pound continues to find it difficult to rally against the resurgent dollar finally slipping below the 1.5645 support level, before rebounding from 1.5610. It now looks certain that we could well see further weakness towards 1.5530, and eventually a return towards this years low at 1.5230. Pull backs should now find resistance around the 1.5670 area, then behind that at this week’s high at the 1.5730 area with larger resistance at the 1.5770 50% Fibonacci level of the same move. The larger resistance remains at the 1.5840/50 level which proved to be such a strong barrier last week.
 
EURGBP – the range trade between resistance around 0.8040 and support around 0.7980 continues, however the key support level remains at the 0.7950 lows of this month. Downside pressure remains the predominant theme while below the 0.8100 resistance level that has contained all attempts to rally so far. It would appear that the rather bullish weekly candle seen two weeks ago could well have been a bit premature, but the lack of any follow through selling towards 0.7950 warrants some caution. If we break below the lows at 0.7950 then all bets are off for a move towards 0.7845 and the November 2008 lows.
 
USDJPY – the U.S. dollar continues to find support just above the 79.00 level but downside pressure remains the predominant theme here, despite remaining above the 200 day MA at 78.60. While below the cloud resistance at 80.40 the risk remains for further declines towards 78.50 and the 200 day MA. Only a close above the 80.42 cloud line would suggest a stabilisation in the dollar.

Spanish markets continue to trade lower as fears that Spain will need a bailout continue to grow.
 
These concerns are continuing to act as a drag on core European markets though the core markets did manage to shrug off a denial by a Chinese news agency that reports that China was considering a large emergency stimulus plan, which had given stocks an early bid bias.
 
Mining stocks are nevertheless the main gainers today on expectations that China will probably ease policy at some stage in the coming weeks.
 
The biggest gainer today has been yesterday’s largest faller, namely British Airways owner International Consolidated Airlines (IAG LN), bouncing back after being sold off yesterday on speculation that bailed Spanish bank Bankia would have to sell its 12% shareholding to raise capital.
 
BG Group (BG. LN) is having a good day after announcing the sale of its majority stake in Brazilian gas distributor Comgas for $1.7bn.
 
Though general sentiment in Europe remains a weighty factor when it comes to the general direction for stocks, company earnings also play a part, as shown by the falls in builders merchant Wolseley's (WOS LN) share price today after the company reported a slide in Q3 revenue, and dropping to the bottom of the index.
 
U.S. markets returned from their long weekend opening higher in what is likely to be a key week for the U.S. economy, with the release of Q1 GDP revisions and jobs data for May, due out at the end of this week.
 
Facebook’s woes continue as the stock continues to trade lower despite the overall benchmark indices having a rather more positive tone.

U.S. consumer confidence took some of the edge off some of the gains after the May number came in at 4 month lows of 64.9, below expectations of 69.2, while the Dallas Fed index for manufacturing activity for May also disappointed coming in at -5.1.
 
Despite the disappointing data markets have held onto their gains as speculation grows that the poor data may prompt the Fed to extend “operation twist” at next month’s meeting.
 
Currency markets have found themselves pretty much side-lined today, continuing to trade within recent ranges.
 
The Euro continues to upside capped by concerns about rising Spanish yields while there does appear to be some decent support building up around the 1.2500 level, however the bias remains for a lower euro given the policy deadlock at the heart of Europe.
 
We’re continuing to see record low yields on 10 year German bunds as investors continue to worry about what the next steps in the euro crisis will be.
 
The Pound has had an indifferent day against most of the major currencies trading in a holding pattern despite some positive CBI retail sales data for May showed a rise into positive territory to 21 from -6 in April.
 
U.S. oil prices have continued to pull away from the $90 level seen earlier this week as, despite poor economic data today, speculation that this week’s GDP revision will continue to point to at the very least an on-going but slow recovery.
 
Gold prices have continued to remain well underpinned helped in some parts by the disappointing U.S. data this afternoon which has once again raised expectations that the Fed may look at further easing at its next meeting in June.
 
Despite the denials of a Chinese stimulus plan copper prices have jumped sharply to their highest levels in a week, on expectations of some sorts of policy adjustment in the coming weeks.

With the crisis developing in Europe, a financial mega-shock could strike at almost any time.  

What is surprising, even though major bankers and policy makers see it coming, it has not prompted them to change their ways. Just consider some of these factors to make up your mind, including....


1.  Before the Lehman collapse in 2008, it was strictly individual financial institutions that were on the edge of collapse. Today, entire nations are on the brink … think Greece …  Spain

2.  In 2007, the U.S. federal deficit was $161 billion. That was already excessive by most historic comparisons. But it was small enough to allow room for more deficit spending to stimulate the economy — without causing wild inflation or panic in government bond markets. Today, the deficit is $1.327 trillion, or 8.2 times larger...

3.  In 2008, most of the megabanks at the epicentre of the crisis were in the United States, where even the largest among them are smaller than their European counterparts. Today it is primarily the largest European banks that are in the most trouble…

4.  In 2008, governments had not yet deployed their “big gun” cures for the debt crisis. So they still had the fire power to ‘handle’ the crisis with a series of unprecedented rescues. Today, we have seen nearly every possible stimulus plan, bailout deal or austerity measures known to man fail or languish at best.

5.  In 2008, governments encountered little public resistance to major new policy initiatives. Today, millions of citizens are rebelling at the polls — or on the streets — in France, Greece, Portugal, Spain, Italy, and even Germany. Look out for the outcome of Greece’s second elections, as well as Ireland ‘referendum’ vote.

6.  Finally, before 2008, central banks were largely restricted to their role of manipulating interest rates. Since then, four of the most powerful central banks in the world (the Fed, ECB, BOE and BOJ) have embarked on the greatest wave of money printing in the history of mankind.

So far all the this has not motivated the majority of investors to run for cover. Instead, they have done precisely the opposite, doubling down on their risky investments. However . . .

1.  When investors sell bad government bonds, the value of those bonds must plunge, making it next to impossible for those governments to borrow, and
2.  When savers run to safety, money must flood from the weakest banks to the strongest, making it impossible for the weak banks to survive . . .

Isn't the end result for the authorities to unleash a new wave of money printing that makes previous waves look small fry by comparison.

To finish reading this article, please Click Here.

Steven Dotsch
Managing editor
Dividend Income Investor.com

 

It would appear that the problems in Spain are now becoming more of a worry than the opinion polls in Greece as concerns about the extent of the solvency of the banking system saw markets push Spanish borrowing costs back to 2012 highs at 6.5% yesterday. The rising costs of the Bankia bailout, now at €23.5bn, has seen the credibility of new PM Rajoy and his government stretched to the point that markets no longer believe a word they say.
 
That would be a problem for any government, but for one dealing with a toxic banking crisis it’s even more of one, given that the government appears not to have any idea as to how to finance this bailout, let alone future ones.
 
When finance minister Luis de Guindos stated earlier this month that only €15bn would be required to bailout the whole of the banking sector no-one really believed him, but the speed with which his words were discredited was a surprise. It also raises concerns as to how much more in the way of bad loans the rest of the Spanish banking sector is sitting on. The bailout of Spain’s banks has already turned into a much bigger and wider problem with no end in sight; and it is becoming increasingly difficult to see how Spain will be able to bail out its banks without recourse to a bailout, given its worsening fiscal position and rising borrowing costs.
 
Other EU leaders are already urging the new €500bn bailout fund (ESM) to be given a banking licence, however for now this seems unlikely given Germany’s opposition to it and the risk that the money could be exhausted very quickly, if needed.
 
This lack of credibility and confidence that investors have in European leaders to resolve the crisis appears to be manifesting itself in a slow migration of capital from southern countries into northern countries as capital outflows from Italy, Spain and Greece increase while rising in Germany, Finland and Holland.
 
In more positive news from Greece four major Greek banks regained access to ECB funding after getting capital injections of replacement EFSF bonds after the second bailout and PSI, as well as deposit outflows saw their capital bases depleted.
 
In economic news German April CPI inflation data is expected to remain unchanged at 2.2%, however there is a risk that the recent slide in the single currency could start to see it edge higher, though this is more likely to manifest itself in the May numbers.
 
The U.S. market returns after the long Memorial Day weekend and the May consumer confidence number, which is expected to follow last week’s positive Michigan confidence number by increasing from 69.2 to 69.5, as consumers recovery hopes increase as lower fuel prices boost recovery hopes.
 
EURUSD – the Euro once again ran into a wall at the 1.2620/30 level yesterday before slipping back. This resistance needs to hold to prevent a short squeeze towards last week’s highs at 1.2820/30. The 2010 post first Greek bailout lows at 1.1880, remain the primary objective and it remains highly likely we will see them, though we might find some support around the June 2010 lows at 1.2150. With the outlook even more bearish the concern remains that we could see a short squeeze on a break above 1.2820 towards the 1.2950/60 level.
 
GBPUSD – the Pound continues to hold above the 1.5645 61.8% retracement level of the entire up move from this years low at 1.5240 to the highs at 1.6305, despite a quick peek at 1.5630 late last week. If we break below that then we could well be looking at a sharp move towards 1.5530. Pull backs are currently finding resistance around the 1.5730 area with larger resistance at the 1.5770 50% Fibonacci level of the same move. The larger resistance remains at the 1.5840/50 level which proved to be such a strong barrier last week.
 
EURGBP – the Euro continue to range trade between resistance around 0.8040 and support around 0.7980. Downside pressure remains the predominant theme though while below the 0.8100 resistance level that has contained all attempts to rally so far. The rather bullish weekly candle seen two weeks ago suggests there is some buying interest below the 0.8000 level. If we break below the lows at 0.7950 then all bets are off for a move towards 0.7845 and the November 2008 lows.
 
USDJPY – the U.S. dollar continues to find support just above the 79.00 level but downside pressure remains the predominant theme here, despite remaining above the 200 day MA at 78.60. While below the cloud resistance at 80.40 the risk remains for further declines towards 78.50 and the 200 day MA. Only a close above the 80.42 cloud line would suggest a stabilisation in the dollar.

European markets initially had a significantly more buoyant tone today as opinion polls in Greece start to show a shift in support to the more bailout friendly parties. Though trading broadly positive for most of the day, upside became difficult to sustain weighed down by concerns about the health of the Spanish banking sector, after the announcement that bailed out lender Bankia had requested an extra €19bn in aid from the Spanish government.

With U.S. markets and a number of other European markets closed there was little in the way of fresh news flow to drive trade flows strongly one way or the other.

In a symptom of the problems in Spain, British Airways owner International Consolidated Airlines (IAG LN) is among the larger fallers on expectations that Bankia would have to sell its 12% stake in the airline to raise capital.

DIY retailer Kingfisher (KGF LN) is also near the bottom of the index victim of a broker downgrade ahead of key earnings announcement out later this week. The biggest gainers have been basic resource and technology shares with mining stocks Antofagasta (ANTO LN), Rio Tinto (RIO LN) and Xstrata (XTA LN) all higher. Talk of an EU bank rescue plan had helped buoy some state owned financial stocks, with Lloyds Banking Group (LLOY LN) higher.

U.S. markets closed for Memorial Day holiday

The U.S. dollar has slid back today as markets put to one side fears of a Greek exit in the face of a shift in the opinion polls towards more pro bailout parties.

The biggest gainers are the commodity currencies of New Zealand and Australian dollar as “Grexit” fears ease, while the Euro has enjoyed a brief respite against the pound and the U.S. dollar for the same reason.

Euro short positions continue to hit record levels and this seems to explain the slightly more positive tone in the single currency today given the lack of any new news flow. Rising Spanish borrowing costs to the highest levels this year have served to limit the euro’s upside, while in the northern part of Europe Finland and Dutch borrowing costs hit record lows as safety flight continues.

The slightly more positive tone in equity markets and the weakness of the U.S. dollar today has helped the commodities space with crude oil prices holding up fairly well.

A slightly heightened tension level between Iran and the UN over the discovery of traces of uranium has also helped put a floor under prices.

Copper prices have continued to pull away from last week’s lows on hopes of an easier Chinese monetary policy as well as some short covering after the declines of recent days.

As we head into the last week of May it once again remains all matters Europe that dominate the headlines this morning, with talk of secret bank takeover plans and Greek opinion polls shifting towards pro-bailout parties, helping boost sentiment.
 
With all the focus on the creaking European banking system there has been talk over the weekend on secret EU plans for struggling banks to be taken over by Brussels and depositors protected by a new deposit guarantee system.
 
This new system would be funded by a new tax levied on banks throughout Europe the proceeds of which would be put into this deposit guarantee scheme. In essence it would mean stronger banks and European nations subsidising the weaker ones. There are a number of concerns with this plan, the obvious one being the time needed to get it up and running, as well as concern that none of the banks in Europe are in that strong a position to pay a new tax, while at the same time striving to bolster their balance sheets, due to new European banking regulations.
 
Over the weekend concerns about the health of the Spanish banking system remained front and centre after it was announced that newly nationalised Bankia needed an extra €19bn of extra bailout money on top of the €4.5bn announced earlier this month, to keep it going in the face of rising toxic property loans.
 
If that wasn’t bad enough Catalonia, Spain’s wealthiest region has warned that the region could run out of money due to having difficulties raising funds due to high interest rates.

There are also concerns about worried investors withdrawing their money and shifting it to more stable banks within Europe which is exacerbating Spanish banks liquidity problems.
 
In Greece the sands of sentiment appear to be shifting back towards the pro bailout party New Democracy where a number of opinion polls showed the party was making gains at the expense Syriza who are opposed to the bailout conditions. The lead however is slender and could just as easily slide back the other way but expect markets to continue to react to the ebb and flow of sentiment with respect to each poll, right up to polling day.
 
In a key test of sentiment Italy is due to sell over €2.5bn worth of bonds today at a time when bond yields on sovereign debt are once again edging back up.
 
Later this week the Irish are also set to vote in a referendum on the divisive fiscal compact with the votes in favour of the treaty change in the majority, however the “don’t knows” could well make the end outcome a lot tighter than EU leaders would like.
 
EURUSD – last weeks close below the 1.2600 level opens up the way for a move towards the 2010 post first Greek bailout lows at 1.1880, though we might find some support around the June 2010 lows at 1.2150. Any rebound, short squeeze, whatever you want to call it needs to be contained by the highs last week at 1.2820/30, though Thursday’s highs at 1.2620 should also provide a decent top. With the outlook even more bearish the concern remains that we could see a short squeeze on a break above 1.2820 towards the 1.2950/60 level.
 
GBPUSD – the pound has so far managed to hang on to the 1.5645 61.8% retracement level of the entire up move from this years low at 1.5240 to the highs at 1.6305, despite a quick peek at 1.5630. If we break below that then we could well be looking at a sharp move towards 1.5530. Any pullbacks in the cable are likely to find stiff resistance at the 1.5840/50 level which proved to be such a strong barrier earlier this week. We are also likely to find resistance at the 1.5770 50% Fibonacci level of the same move.
 
EURGBP – despite a brief push below the 0.8000 level in an attempt to retest the lows seen two weeks ago at 0.7950, the euro has held above it.
Downside pressure remains the predominant them though while below the 0.8100 resistance level that has contained all attempts to rally so far.
The rather bullish weekly candle seen two weeks ago suggests there is some buying interest below the 0.8000 level. A move below 0.7950 would negate that risk in the short term, and while 0.8100 caps expect to find rallies sold into, and if we break below 0.7950 then all bets are off for a move towards 0.7845 and the November 2008 lows.
 
USDJPY – the U.S. dollar continues to find support just above the 79.00 level but downside pressure remains the predominant theme here, despite remaining above the 200 day MA at 78.60. While below the cloud resistance at 80.40 the risk remains for further declines towards 78.50 and the 200 day MA. Only a close above the 80.42 cloud line would suggest a stabilisation in the dollar.