Rumours in the market that Spain is in need of some €280 billion didn’t do the euro and equity markets any favours yesterday.  US stocks also sold off as the fears over contagion within the euro zone mounted, but after its initial declines early on in the session the Dow moved sideways, so Europe this morning is finding a little bit of support for now.

The euro has slipped below the 1.3000 level for the first time in over a year showing just how nervous European investors are.  Even if the Spain bailout was just a rumour, the chances of them requiring such funding has increased and as we saw with the banks during the credit crunch, once one falls others soon follow.  Few will have forgotten when rumours circulated in the City that there was going to be a run on HBOS “a la” Northern Rock, only for a ban to be placed on short selling banking stocks and then shortly after Gordon Brown forced Lloyds to take over HBOS before it went bust.  Rumours often have a nasty habit of coming true.

As mentioned the markets this morning have been attempting to find some support, but without out too much luck.  The FTSE has now dipped below the 5400 mark bringing the declines to nearly 8% since the highs of mid April.

Since this bull run started back in March 2009 this is the third pronounced correction to the downside, with the first one coming in July 2009, the second in January 2010 and now this one.  Both the past two moves lower before this one were around 9-10%, so if this one replicates those retracements we may not see serious support until the 5300 area.

To say that the overall uptrend has broken down we would need to see the FTSE not only take out lows around 5000, but fail to breakout above the April highs around 5830.  Just when the bulls were getting excited about reaching 6000, the market has sharply corrected to the downside, but it’s still too early to say that the bull run is over.

The euro had few friends yesterday or overnight as the selling continued throughout the Asian session.  Now at around 1.2950 there really is little support EUR/USD and bears will be targeting 1.2920 and then 1.2855.

Cable seems to be holding up well, still above the 1.5100 area, despite the looming prospect of a hung parliament, but weakness has set in after an early attempt to get back to 1.5200 and bears will be targeting the 1.5090 area that we touched yesterday.  The next couple of days should be very interesting for cable as the election gets underway tomorrow and over night as the results roll in, key seat results will lead to a volatile overnight session.

The euro’s woes and sterling’s stubbornness has meant a mini break out to the downside for EUR/GBP as the support gave up around the 0.8600 area.  The move lower has taken us to 0.8555 or 1.1680 for those who prefer to look at GBP/EUR.

Gold has suffered a real risk aversion hit as it has tumbled from the dizzy heights of 1191, looking like heading back above 1200, before retracing sharply in the last couple of days.  It comes as a little surprise that gold has suffered such a move to the downside as it’s been contributed to worries over European sovereign debt, which has been seen as the main driver for its recent strength.  This move shows how the precious metal is still highly correlated to the equity markets and risky assets, so any further equity weakness could send gold even lower.  At 1165 this morning there’s support around this area, which has in the past served as resistance.

Like gold, crude prices have also suffered from risk aversion and Nymex is back around $82.  Repeated failures around the 86.50 mark indicate that momentum maybe running out for oil prices, but like equity markets, we’ll need further substantial declines to completely shake out the bulls.

Last Updated: May 5th, 2010