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Greece to hold fresh election

Last updated 5/15/2012 12:48 PM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Market Strategist, GFT

Follow @DMorrison_GFT

Tuesday 15th May 2012

Headlines

EURUSD breaks below 1.28

Chart To Watch - GBP/USD

At the time of writing the GBP/USD is hovering near its session lows, testing 1.6000/20 as support. This level corresponds with a medium-term bullish trendline, which you can see from the daily chart, below. However from a longer-term point of view, the trend is still bearish, as highlighted by the red downward sloping trendline. Since the last unsuccessful attempt to break above this line on 30th April, GBP/USD has moved more than 280 points in bears’ favour, falling from a high of 1.6300 to a low of 1.6018 so far in today’s session. It is worth keeping an eye on this FX pair as a break through 1.60 could mark an end to the strong bullish move we have seen since the turn of the year. The conflicting technical indicators suggest the near-term outlook is highly uncertain. However, compared to the EUR or AUD, the GBP has fared remarkably well in this risk-off trading environment. This suggests that GBP is attracting some safe-haven flow (possibly out the EUR/CHF due to the 1.20 floor), which means the bulls are likely to keep it bid if the situation in the eurozone deteriorates further.

GFT Inflation Indices

Most Actively Traded Instruments

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

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5431.0	- 35.0	- 0.63
Germany 30 Cash	.DE30	6393.0	- 59.0	- 0.91
France 40 Cash	.F40	3036.0	- 22.0	- 0.71

UK Market News

Asian Pacific markets outside Hong Kong closed lower on Tuesday. Investor sentiment was again bearish due to the on-going political impasse in Greece and ahead of key European and US economic data due later in the session. Meanwhile minutes from the Reserve Bank of Australia’s last meeting revealed little hints on future interest rate decisions. But with inflation under control and given the recent weakness in housing activity, interest rates could get edged lower later in the year. The Australian S&P/ASX closed down 0.7%; Japan’s Nikkei shed 0.8%, and the Shanghai Composite in China retreated 0.3%. However, Hong Kong’s Hang Seng bucked the trend with a 0.8% gain, boosted by M&A talks.

The major European stock indices were a touch firmer this morning with the FTSE 100 up 0.4% and DAX up 0.6%. We had a stronger-than-expected German GDP reading which helped the eurozone economy to avoid a technical recession. This led a brief rally in the major indices. But investors showed little interest to pile back into equities, especially after the release of weaker-than-expected ZEW numbers.  As a result, the early rally fizzled out. Banks, though, managed to hold on to their early gains after Royal Bank of Scotland (RBS.L) was upgraded by Morgan Stanley to “equal-weight” from “underweight.” G4S (GFS.L) was the standout winner, up nearly 4%, after the security firm reported strong growth in first quarter revenues and gave an upbeat forecast.  Oil majors also rose but miners fell.

The German economy expanded 0.5% in the first quarter of this year following a 0.2% contraction in the last three months of 2011. This was much better than the average forecast of 0.1%, helped by strong domestic consumption and robust exports. But the rest of Europe struggled to grow amid the on-going debt crisis and austerity measures. The Dutch (-0.2%) and Italian (-0.8%) economies contracted for a third straight quarter while the French economy showed no growth and output in the fourth quarter was revised lower (+0.1% from +0.2%). The eurozone as a whole narrowly avoided a recession, thanks to Germany, as GDP stagnated following a 0.3% contraction in the last quarter of 2011. The wider European Union grew just 0.1%. Also today, the UK’s trade deficit in goods came in at £8.6 billion in March, unchanged compared with February but worse than expectations of £8.4 billion. The volume of exports was up 6% month-on-month in March and imports up 2.4%. Leading Indicators were unchanged at 1%. Meanwhile the German ZEW Economic Sentiment plunged to 10.8 in May from 23.4 in April, disappointing forecasts of 19.1. The same survey for the eurozone printed -2.4, which also was sharply lower compared to the previous reading (13.1) and estimates (11.7).

In the afternoon stocks fell sharply on more sentiment-sapping news out of Greece.  Political leaders failed to form a government which means there will be another election in June. The uncertainty surrounding Athens’ future saw investors trim their long-side exposure and head back into the relative safety of the US dollar and bond markets of the US, Germany, Japan and the UK. The EUR/USD plunged below the 1.28 mark while all the major stock indices spiked lower. The FTSE then staged a 40-plus-point rally off 5410. Here, many short-side traders had placed their limit buy orders due to the fact it ties in with the 127.2% Fibonacci extension of the first leg of the sell-off from March 13 high (6000.8) to April 10 low (5538.8). The sellers may re-emerge around 5470.  

Big Winners

Big Losers

US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,742	+ 46	+ 0.36
US 500 Cash	.US500	1,343.0	+ 4.50	+ 0.34
US Tech 100 Cash	.USTECH	2,614.0	+ 22.5	+ 0.86

US stock markets closed sharply lower yesterday. The Dow fell 1.0% while the S&P and Nasdaq shed 1.1% each. The sell-off came as the political turmoil in Athens continued and as central bankers for the first time discussed publically Greece’s potential exit from the euro area.

US stock index futures were sharply higher this morning, and close to making back all of yesterday's losses. Although Asian Pacific markets were mostly weaker overnight, European equities managed to bounce this morning. After declining sharply since the beginning of May, stocks were looking oversold. This morning's release of better-than-expected German and French GDP numbers provided the catalyst that buyers were looking for. The EURUSD managed to rally off a technical Fibonacci level just above 1.28, and this is encouraged a move back into risk assets. But whether this fresh upside momentum could be maintained or not was, to a great extent, dependant on fresh news out of Europe. And we got it just prior to the open. The latest meeting in Athens ended without the formation of a new government which means there will be another election in June. The uncertainty surrounding Greece's future persuaded many investors to cut back on their long-side exposure and head back into the relative safety of the US dollar and bond markets of the US, Germany, Japan and the UK. The EUR/USD plunged below the 1.28 mark while all the major stock index futures turned lower. This led to a mixed start on Wall Street with the Dow and S&P opening 0.1% lower and Nasdaq 0.2% higher.

The risk of a swift Greek exit from the euro zone may be overstated as it looks increasingly likely that European political leaders will pull out all the stops to keep the single currency dream alive. Nevertheless, the uncertainty is keeping the pressure on Spanish and Italian bond yields and the health of both countries' banks is being increasingly questioned. As far as the US is concerned, there is still a feeling that the country can avoid most of the fallout from a fractured euro zone. Given the globalised nature of the banking system, that seems unlikely. On top of this, JP Morgan's $2 billion-plus trading loss from its "hedges" also raises doubts as to the health of our "too big to fail" financial institutions. However, there is the Facebook IPO to look forward to which may help to lift spirits this week. Today we had Retail Sales, CPI, the Empire state Manufacturing Index and Business Inventories on which to focus but these were largely overshadowed by news out of Greece. The headline and Core Retail Sales both came in at +0.1% month-on-month in April, disappointing expectations of +0.2 and +0.3 percent respectively. CPI was unexpectedly flat in April vs. expectations of +0.1% and previous reading of +0.3%. This is yet another piece of good news for those wishing to see further Fed stimulus, although Bernanke and his FOMC colleagues are still in the “wait and see” mode. Meanwhile the Empire State Manufacturing Index jumped to 17.1 in May. It was up sharply from 6.6 previously and easily above forecasts of 9.3. TIC Long-Term Purchases rose strongly also, to $36.2 billion in March from $10.1 billion the month before. And Business Inventories came in at +0.3% vs. +0.5% expected while the NAHB Housing Market Index rose to 29 from 25 previously.

Technical Outlook - DAX (.DE30)

Here is a daily chart of the DAX. After the break of the bullish trend line at the start of the month, the bears have made several attempts to push index through a key support area of 6345 to 6425. So far, the bulls have not buckled under pressure and, as a result, the index has managed to hold above 6425 (the previous resistance level) on a closing basis on every single occasion. There has also been support around 6345/50, an area which ties in with the 38.2% Fibonacci retracement of the September-March rally. The index bounced off this level today and it will be interesting to see where it closes. The fact that these levels are holding firm despite the latest Greek news (see above) is encouraging for the bulls. A break below 6345 could open the way for a move to 6185, which marks the 200-day moving average. On the upside, there is resistance at 6450, followed by 6500 and then 6550.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1556.0	- 1.0	- 0.06
Spot Silver	.SILVER	2814.0	- 1.0	- 0.04

Gold and silver were sharply higher in early trade this morning as the euro firmed up against other currencies. The EURUSD bounced off 1.28 which marks the 78.6% Fibonacci retracement of its January-February rally. This level is seen as key as a close below here opens up the possibility of the euro falling back to 1.2620 - its January low. Germany's GDP was stronger than expected and this triggered a buying spree in risk assets, although a poor ZEW survey took some froth off the rally. However, precious metals gave up their gains following the news that Greek party leaders failed in their final attempt to form a coalition government. New elections now look set for June, and investors are concerned that Greek voters will emphatically reject parties who back austerity measures in return for further bailouts. Yesterday, gold found support around $1,550 which marks the closing low back in December. But a failure to hold above here suggests that a retest of the December intra-day low at $1,522 is on the cards. Silver is holding up slightly better, but looks vulnerable to further weakness on a technical basis.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11126	- 35	- 0.31
WTI Crude Oil Spot	.WTI	94.48	- 0.28	- 0.30

Crude managed to stabilise in early trade today, but later lost ground on protracted euro weakness. The single currency broke below 1.2800 against the US dollar which opens up the possibility of a retest of the December low of 1.2620. Such a move would weigh on oil prices thanks to US dollar strength. However, analysts at Barclays have highlighted that the EURUSD is now testing a trend line which links the June 2010 and December 2011 lows with its current level. Given the severity of the recent sell-off, a bounce may be on the cards. This would help to lift crude should it transpire, and it could be argued that with a second Greek election now certain, the immediate bad news is already priced in. The better-than-expected German GDP has also helped to support crude which has fallen sharply on concerns of a protracted slowdown in global growth and a relaxation in geopolitical tensions. However, there is another round of talks involving Iran and 6 world powers next week to discuss the country's nuclear ambitions. Hopes are running high that further agreement will be reached between all parties, so there is scope for disappointment.

Looking forward - Wednesday 16th May

15:30 USD Crude Oil Inventories

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About The Author

David Morrison has worked in financial markets for over 25 years. He joined GFT in February 2009 to deliver commentary and research for derivatives products. Before then David had been instrumental in setting up two spread betting companies, managed trading desks, and implemented and ran successful risk-management strategies.

He has appeared on Bloomberg, Reuters, and Sky TV, and is widely quoted by financial newswires. He has written numerous articles covering economics and trading strategies using fundamental and technical analysis.