In a long life of watching French foreign policy it has generally been my opinion that it can be summed up in one line: “If it is good for France, it is our policy.”
Yesterday saw the extension of this into the financial arena. French banks and Investment funds have by far the largest exposure to Southern European debt in relation to their size and so ‘Lo and Behold!’ France comes out on the side of some kind of European wide guarantee on Greek debt. While Germany, heavily exposed… but affordable (just), is at pains to try to avoid a sovereign guarantee may find it difficult if the weight of opinion starts moving away from them. Any bets on the UK managing to avoid being dragged into contributing a sizeable slug as well?
Greece will almost certainly get the money in the end as the rest of Europe will pay lip service to the probable passing of the Hellenic austerity package. In reality we all know that passing a budget is one thing, actually implementing it (when you have got the money you needed) is quite another. A huge swathe of Greek citizenship pays no (or very little) tax on their earnings and changing this around requires, as a minimum, an inland revenue service that is able to deliver and then also requires a population, being squeezed from every direction, to acquiesce. Not just this year, but next and next and next….
This commentator, for one, is not going to hold his breath.
So the whole crisis will probably be bottled up for yet one more turn of the wheel, only to come back as an immeasurably larger problem in a few years time.
FX
The Euro remains strong versus the Dollar and Pound as the Far East continues its policy of asset reallocation away from the Greenback. Compounded with this is the fact that the EC as a whole is a very big net exporter (Germany actually exports more than China!). Both the Yen and the Swiss Franc are now at extreme valuations versus any reasonable comparative measure (this does not mean that they cannot become more extreme, of course!) and so it is unlikely that long term asset reallocation will focus on these currency units and the Yuan, Rupee etc are either not convertible or liquid enough to tempt investors. This leaves the Euro as the depositary of choice. Not only this but it suits the Far East to have a strong Euro as this aids exports and impedes competition in their domestic economies.
At some point this will grind to a halt but (probably) not for a good while yet.
The Euro is pushing higher in early trade having reversed the weakness of late last week. We are just below medium term resistance at 1.4390/1.4400 but dealers look to be pushing for another attempt on the mid 1.44’s. For the last four months we have oscillated in a wide range between (roughly) 1.40/1.41 and firstly 1.49 then 1.47 and lately 1.4450. Both the lows and the highs of each move have been contracting around a mid point area of 1.4400 to 1.4450 which is just about where we are now. Resistance above us is at 1.4420/25 (weak) 1.4445/55 (medium) and 1.4500/20 (stronger). Support is at 1.4345/50 1.4325/30 and below here at 1.4300/05.
The pound continues to suffer versus virtually everything (and is finding it tough even against the Dollar). The accepted BOE policy of low interest rates into the foreseeable future are not exactly helping and it has to be admitted that our clients have been struggling as they have tended to not believe the weakness. Versus the Dollar we have hit a support of sorts at the low 1.59’s but there has been precious little ‘bouncebackability’ evidenced so far. If we break and close below the 1.5910/1.5930 support then there may well be a sharp reaction lower but whilst it holds we will probably continue to see buying in the hope of a return into the 1.60’s. Versus the Euro the situation is even more pronounced as we flirt with the lows for the year (1.1060) and the prospects for imported UK inflation look worse than ever. It is not a situation that is likely at this point but with interest rates at ‘bugger all’ and inflation at over 5% investor in UK assets are looking at a hefty annual depreciation even if asset values nominally stand still. If confidence starts to slip in the ability of Britain to control the Budget deficit then we may slither towards Southern European sovereign yield levels.
Indices
Markets have decided that the woes of both the political and the economic variety can be safely ignored for the moment. And investors (who have been absent for quite a while) are looking at the current valuations as a buying opportunity. The FTSE is back above 5800 for the first time in a couple of weeks and traders will be watching the 5825 level as this is where we failed last time to recover the lost ground.
Resistance is therefore pretty obviously initially at this point 5825/30 and then more solidly up at 5885/90. Support is at 5785/90 and then 5765/70 before more powerful resistance to any weakness at 5730.
The Dow has performed better than the European indices in recent months (or at least less weakly) and the last few sessions seem to have turned sentiment around. We are now above 12200 and the prospects ‘look’ reasonable. This is in the face of actual economic data which is much less pleasing. Traders will be watching 12240 for a near term failure as more buyers may come in above this point. Shorts are being squeezed and traders will also be worrying that this is actually the reason for the whole rally of the last few days.
Commodities
Gold seems to have survived another of its periodic attempts to pull back but dealers do not seem to be as aggressive in buying as they have been in the past. 1550 seems a bridge too far but we run out of sellers below 1500. There is resistance at 1511/13 and 1517/18 and support at 1500 (naturally), 1495 and 1490. Expectations do not seem high that any of these will be threatened today.
Oil is also bouncing with no appetite to short below $105 (brent). We are back above 108.20/50 which was the support through May and the Bulls will be looking for 112.00 as the near term target (even though it is 250 cents away). There is minor resistance at 110 and 111 (nice round numbers) but as the effects of the reserves release drains away we may find that the bulls regain the initiative.
This comment is from Capital Spreads.
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