Pressure from European politicians has succeeded in getting the ECB to relax its collateral rules, in order to try and save a patient whose life support was switched off a while ago. The market has pretty much fully-priced in a default by Greece, as fewer and fewer international investors are willing to through good money after bad. The cost of servicing their debts is so great now that the likelihood of anyone who buys Greek government bonds, getting their money back, is slim. As a result, either the IMF or EU will have to step in to support Greece, which will not only be costly, but mean that interest rates in the euro zone will stay lower for longer.
The ECB faces a dilemma now with a two-tier Union, where the likes of Germany and France are storming ahead, with the PIGS are falling by the wayside. This will seriously hamper their ability to withdraw their emergency stimulus measures and raise rates, particularly if they need to when inflation picks up again.
A little bounce in US indices means the FTSE is set to open around 5745. Metal and energy prices are a bit stronger this morning, so we can expect those stocks to lead the way. On the economic data front, there’s only a trickle with the highlight being UK output inflation data, which is expected to show its fastest rise in over a year, as commodity prices have made a bit of a rebound over the last year.
Near-term resistance is at the recent highs around 5800, and the bulls might want to have another look at that area to see if momentum can take us higher. Once again, a little bit of profit-taking has led to a buying opportunity and the big correction to the downside, which many expect is still yet to materialise.
The euro found some support following the comments from the ECB President, who is a lot more optimistic about Greece being able to avoid defaulting on any of its loan obligations than many in the market place. EUR/USD bounced again from the levels last seen at the end of March of just below 1.3300, where it recovered back to as high as 1.3600. The little bounce yesterday afternoon led us back to the 1.3350 area, and euro bulls (if there are any left!) will be hoping that a double-bottom has formed around the 1.3300 area, providing sufficient support for a move higher. However, it won’t take much to fuel the bearish momentum once again, and even though a Greek default is priced into EUR/USD now, it is unlikely that others (Spain, Portugal) will follow, so further weakness and a test of 1.3000 cannot be ruled out, if the country does ultimately default.
Cable also enjoyed a bit of a recovery back to above the 1.5200 level, and on the hourly chart now has made a triple-bottom around 1.5150, so for the short-term a bounce beyond 1.5300 is a possibility, however it’s hard to see this happen, unless the Tory lead in the polls increases.
Gold initially fell and recovered back to above the 1150 late on, after tracking sideways. The precious metal has benefitted well from the increase concern surrounding the Greece situation and a sell off in equity markets. Any further euro weakness will most likely serve to push gold higher, and for the bulls, the next target will be 1160. Gold prices in euros once again reached an all-time high yesterday, so the bulls will fancy another leg higher soon.
Crude is also hovering just below its recent highs at $86.10. The weaker-than- expected initial jobless numbers led to a little selling, but the bulls kept oil propped up. If we head lower in the days ahead, bulls will be expecting support around the previous resistance levels, which comes in between $83-84.