If the Germans and French remain reluctant to put their money in the pockets by either using the ECB’s potential firepower or create a special eurobond then they could themselves become the very nemesis of the single currency that they tell us they are so desperate to keep. Even so, risk aversion continues to whittle down the markets; at the time of writing the index is at 5380, down some 25 points. Traders are watching term support trends at 5335, 5300 and 5275; hopeful bulls out there will be looking for resistance at 5490, 5615/45. This near term downward trend sees the index capped by a downward trend line that also puts some resistance at 5450. Over the longer term now that the index has broken below its 200 day moving average and its upward trend line a close below 5400 could been seen as very negative and we’re now in the territory of people not wanting to catch a falling knife.
While immediate market focus will remain on Europe and its affect on the macro picture, there are a couple of important pieces of data that UK investors should note. First, following a surprising improvement in April, unemployment numbers are likely to show a weakening labour market. There’s little in the way of encouraging data from the UK at the moment, but last month’s data was the first indication that unemployment is starting to peak. Job creation has come largely from part time rather than permanent work and the tick downwards to 8.3% in the rate of unemployment is expected to rise back to 8.4%. Second, it will be interesting to see whether the upcoming Bank of England’s inflation report will encourage the central bank to stick to their hawkish guns or whether the confirmation of the double dip recession and a further downgrading of growth projections will result in a more dove-ish tone.
Other European indicators are not great either: Italian ten year yields have crossed back above 6% and for Spain back above 6.5%, meanwhile risk adverse investors piled into German bunds driving their cost of borrowing even lower. This is classic fear gripping the markets once again as the vicissitudes of 2012 look to be playing out in a very similar fashion to 2011. Financial markets detest uncertainty and at the moment they are riddled with them since Greece has been unable to form a government and has had to call for a new round of elections on 17th June. Up until that point we can expect volatility to remain high and continued pressure to the downside.
The euro made a low of $1.2720 as the situation in Greece continues to deteriorate. Bears sold the single currency heavily after socialist leader Evangelos Venizelos announced that talks to form a coalition government had failed and that the public would have to go back to the polls next month. Gold continued to fall as traders dumped risky assets and piled into the safety of the US dollar. Spot gold traded as low as $1541 an ounce. With little technical support seen until $1531 and no turn around in Greece on the horizon, the down trend looks set to stay firmly in place.
On top of all the European woes there’s also the growing concern that China is slowing down quicker than was previously thought. Add any downturn to the euro crisis and it has negative connotations for global growth.
As ever, ladies and gentlemen, place your bets...