The credit worthiness of various EU states continues to give cause for concern and the downgrades of Greece to just north of Junk status has rather concentrated minds on the problem.

10yr Greek debt is now trading at 2.5pc above the equivalent German Bonds and, given that it has always been considered that there is a ‘quasi’ EU guarantee over all sovereign issuance, this discrepancy gives credence to the fear that certain nation states may be forced out of the Euro Project altogether. The strength of the northern European nations has continued to hide the weakness of many of the peripheral nations but if Germany and France et al are forced into a rescue mission they risk falling into the clutches of the famous proverb “do not throw good money after bad”.

This having been said it is very unlikely that even a partial break up will actually occur and the most probable scenario is that the Greek authorities will be forced into an ECB instigated fiscal straitjacket. Unfortunately for the powers that be there is a certain inevitability about their having to intervene as, once one has been booted out, the focus will then move on to the next weakest member and so on.

In this environment dealers are naturally concentrating on Euro weakness and the currency has fallen to levels not seen since August. We have commented continuously through November that there seemed to be nervousness about prices above 1.5100 for all the talk of dollar weakness. We are now down at 1.4400 having dropped 7 cents in the last two weeks and the strong upward trend line gave way on the 4th of this month. There is support from 1.4370 to 1.4400 but it must be admitted that the direction looks pretty one way at the moment. That said, support levels are what they say and we are seeing strong Euro buying in the early hours of today’s session.

Sterling has also fallen to support at 1.6200 and we are seeing interest at this level as well. Over the last eight sessions the Cable cross has battered away at 1.6175 to 1.6200 on an almost daily basis with markets continually rebounding from the level but then failing to make much headway in the other direction either and generally peaking out in the mid 1.63’s

The weakness in the Euro has given the Dax a bit of a boost and while the FTSE and US markets struggled to hold onto yesterday’s gains the Dax had no such problems reaching a new traded high for the year. This morning the Euro markets have pulled back slightly but it must be said that that they seem (only seem mind you) happier at these levels than the other Western Indices.

Once again the FTSE gave up the ghost in the Mid 5300’s reaching around 5340 before selling off. This region around 5350 has proved rich pickings for our clients as they continue to sell on any attempt at the level. To date this has been the wise move but traders must beware a break out especially as we approach the year end window dressing season. We are currently at 5285 with weakness being more apparent but clients will be eying the 5250/60 level which has proved supportive very recently. Below here 5175 to 5200 is the major price level to watch. Since September this has proved to be either a strong barrier or strong support. When breached, in either direction, it has seen quite large movements only for the markets to eventually drift back to the price.

With the dollar looking a bit stronger Gold continues to struggle to regain momentum the 1140 to 1150 level is proving something of an obstacle to the upside and weakness seems never far away. Traders do not appear keen to attack anything below 1110 either so punters will be hoping for a range trade environment to make their plays. The sharply rising short term trend line is currently at the $1110 level with the much longer one year trend support significantly lower at around $1040. This is to emphasise that while we have seen a 100 dollar pull back this has not, yet, impacted the bullish momentum.

Oil has finally managed a rally making a dent in the general weakness that has been apparent since the highs of October. While this has been very nice for the bulls who have been under rather a lot of pressure recently it must be said that 73.30 seems a difficult price barrier to overcome (for Nymex). We printed 73.50 yesterday but the spike was very short lived and sellers were keen to get in.

Last Updated: December 17th, 2009