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European equities lower despite Greek deal

Last updated 2/21/2012 1:21 PM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Derivatives Market Strategist, U.K.

Tuesday 21st February 2012

Headlines

Dow hovers around 13,000

Chart To Watch - DAX (.DE30)

Here is a daily chart of the DAX. The German benchmark was little-changed today as the markets struggled to decide on direction after Greece secured its second bailout. Short-side speculators will be keeping a close eye on the 7,000 barrier now. Not only is this a psychologically-important level, but also ties in with the previous area of support and the 78.6% Fibonacci retracement of the sell-off that began in April and ended in September. From there, the index could fall all the way to the next major level of support around 6,800. Beyond that support should come in at 6,650 and then around 6,575. However a break above the 7,000 threshold could see the rally stretch to near the 2011 highs, if not beyond.

GFT Inflation Indices

Most Actively Traded Instruments

Index	Commodity	Equity
Wall Street (.US30)	Spot Gold (.GOLD)	Vodafone (VOD.L)
UK 100 (.UK100)	Spot Silver (.SILVER)	Barclays (BARC.L)
Germany 30 (.DE30)	Brent Crude (.BRENT)	Apple (.AAPL)

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5928.0	- 17.0	- 0.29
Germany 30 Cash	.DE30	6908.0	- 40.0	- 0.58
France 40 Cash	.F40	3465.0	- 7.0	- 0.21

UK Market News

The troika of EU/ECB/IMF finally agreed a second bail-out for Greece early on Tuesday. Private bondholders are being asked to accept a haircut of 53.5% rather than the 50% they had agreed on previously.  There will also be an "enhanced and permanent" presence of EU monitors in Greece to oversee economic management. The news was met with little enthusiasm from Asian Pacific investors where the major stock indices closed mixed.  Hong Kong’s Hang Seng eked out a gain of 0.3% while Japan’s Nikkei slipped 0.2%. However the Australian S&P/ASX and Shanghai Composite outperformed as they rose around 0.8% each.

European stock indices opened lower and drifted throughout the session today. The Greek bailout news was already priced in and there was no major economic data to provide further direction. Investors shrugged off UK data which showed a bigger-than-expected surplus of £10.7bn in public finances. Expectations were for £8.9bn following on a deficit of £11.1bn in December. Equity traders were taking their cues from EUR/USD, which managed to remain positive despite heavy selling pressure this morning. On top of this, short-side speculators tried but failed to drive the major indices below significant levels of support. For example, the FTSE 100 bounced almost 30 points this morning after it touched 5920, a level which had capped the index’s upside for the past three weeks. Although the buying momentum faded as the session wore on, this level continued to provide support. Eventually the FTSE ended lower while the other indices erased some of their earlier losses. But if stops below 5920 are tripped, then we could see a sell-off in the FTSE 100. However this looks unlikely for now. Equities continue to get a lift from central bank intervention, and the ECB is expected to announce a significant increase in its Long Term Refinancing Operations at the end of this month.

Big Winners

Big Losers

Stock	Ticker	Price	Change	Percent
Tullow Oil	TLW.L	1,543.00	- 58.00	- 3.62
POLYMETAL INTERNATIONAL	POLYP.L	1,045.00	- 39.00	- 3.60
WPP	WPP.L	799.50	- 17.00	- 2.08

US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,990	+ 40	+ 0.31
US 500 Cash	.US500	1,366.0	+ 4.0	+ 0.29
US Tech 100 Cash	.USTECH	2,598.0	+ 15.0	+ 0.58

US stock index futures were higher this morning and indicating a firmer open for equities. However, the indices slipped back from earlier highs, and were little-changed from where they were trading yesterday, prior to the Greek bailout deal being agreed. There is a general feeling of relief that euro zone finance ministers finally sealed the deal with Greece, but concerns still linger. Private bondholders are being asked to accept a bigger haircut than they agreed at their last meeting, and this could be a problem. In addition, the projections for Greek GDP growth look optimistic, given the austerity measures in place. This means that Greece's latest 2020 target to cut national debt to 121% of GDP will be difficult to achieve. In fact, some analysts already believe that Greece will be back for another bailout, sooner rather than later.

For now, the stronger euro is helping to support risk assets. The major indices opened higher and continued to climb as we headed into midsession.  Equities continue to get a lift from central bank intervention, and the ECB is expected to announce a significant increase in its Long Term Refinancing Operations at the end of this month. If they fail to deliver, then we are likely to see a general sell-off as investors "de-risk." There is no US economic data due out today, but traders will be keeping a close eye on crude oil. Prices jumped sharply yesterday after Iran banned exports to Britain and France. Although the volumes of oil involved are relatively modest, the action pointed to rising tensions between the West and Iran. WTI and Brent have both broken above significant resistance levels, and this could add to current upside momentum.

Technical Outlook - Italy 40 (.IT40)

Here is a daily chart of the Italy 40 cash index. There is an apparent “cup-and-handle” technical chart pattern in the making, as you can see below. As its name suggests, it resembles the shape of a tea cup. More importantly, it is a bullish continuation pattern and usually precedes a large move to the upside. But it’s unclear whether the handle is indeed the one I have pointed out or to be seen in the near future. Nevertheless this is a breakout-trade formation, so we will keep an eye on the 17,000 threshold. As well as being a psychological number, 17,000 also marks the 38.2% Fibonacci retracement of the last large price swing, so it is a key level. Also notice how the index has consolidated around the 200-day moving average and the trend line resistance. This also resembles a typical break-out scenario. If the move comes to fruition, then we could be looking at 19380 – the 61.8% Fibonacci retracement - as our initial target.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1755.0	+ 20.0	+ 1.18
Spot Silver	.SILVER	3410.0	+ 52.0	+ 1.56

Precious metals were sharply higher again today. There is strong support for gold at the $1705 level while $32.50 is still holding as a floor for silver. The next levels of resistance for gold and silver are around $1760 and $34.50 respectively. Today, traders are heading for the relative safety of precious metals in favour of riskier equities as scepticism grows about the latest Greek bailout. With severe austerity measures stifling growth prospects, a reduction of the country’s debt to a more manageable 120% of its GDP by 2020 looks over-optimistic. On top of this, private bondholders are being asked to accept a bigger haircut than they had agreed on previously. This means more losses for insurance and pension funds, which is not supportive for equities. Gold bulls will also take comfort from the fact that there is strong physical demand with central banks now being net buyers of the yellow metal for the first time in over 20 years.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	12054	+ 60	+ 0.54
WTI Crude Oil Spot	.WTI	105.12	- 0.15	- 0.15

Overnight, crude oil futures rose slightly after Greece secured a long-delayed second bailout from the EU/ECB/IMF troika. However once the European session got underway both Brent and WTI began to slip, tracking equities as they turned lower, and a weaker euro. Traders were closing out long positions they had opened last week when WTI surged 5%. There was no data out today to drive the paper market and the Greek news was already priced in. Brent was hovering above the $120 mark and WTI near $105. The physical market remains supported by supply-side concerns stemming from Iran, South Sudan and the Middle East. So traders are looking to “buy the dips” on balance. The $103.30/70 level is important for the WTI contract. This area had acted as resistance going back to May 2011. But now that it has broken above this level, it has paved the way for a run towards last year’s highs around $114.

Looking forward - Wednesday 22nd February

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About The Author

David Morrison has worked in financial markets for over 25 years. He has been instrumental in setting up two spread betting companies. He has managed trading desks and has implemented and run successful risk-management strategies. He has appeared on Bloomberg TV and has written numerous articles covering economics and trading strategies using fundamental and technical analysis. He joined GFT in February 2009 to deliver commentary and research for derivatives products, and trades on his own account.