After last week’s melodrama surrounding Spanish and French austerity budgets, and the Spanish banking stress tests that appear rather optimistic with respect to the recapitalisation amounts, we start a new week and a new quarter focussing back on the same deteriorating economic fundamentals, that are acting as such a toxic cancer to the crisis in Europe, as well as an important ECB meeting on Thursday.
On the face of it while both the Spanish and French budgets appear to satisfy the requirements of the EU in terms of their attempts to cut their deficits, there was also equal unanimity amongst impartial observers that the growth projections for 2013 for both budgets appear wildly optimistic.
Spain plans to borrow €207bn in 2013, well above this year’s figure so far of €145bn, with another €20bn due later this month, and at a time when economic data shows no signs of improving.
With the latest banking bailout set to push their deficit well above 7% of GDP this year, it can surely be only a matter of time before Spanish PM Rajoy will have to ask for a bailout, irrespective of the truculence of his regions.
The numbers simply do not add up and last week’s budget could well give him the political cover to press the ECB into action, in the hope that the steps taken will be enough to prompt a positive response, with no further conditions.
As if it to highlight the magnitude of the problem publication of Spain’s September manufacturing PMI data is set to show another sharp contraction and not expected to improve much from August’s 44 reading.
September Manufacturing PMI data across Europe is also set to disappoint today with Italian, French, German and Eurozone all set to show contractions with readings of 44, 42.6, 47.3 and 46 respectively.
Italian unemployment is also set to rise in August to 10.8%, further heaping the pressure on Italian PM Mario Monti, while the benchmark European unemployment measure is set to rise to a new record of 11.4% in August, from 11.3% in July, and increase the calls for some form of plan to promote a growth and recovery plan.
In the UK the picture isn’t much better with manufacturing PMI for September set to show a slight fall from August’s 49.5 to 49.3, however there was some improvement in the money supply figures in July which could well feed through into an improvement in mortgage approvals in August which are expected to rise to 49.3k from 47.3k the previous month.
The August M4 numbers are expected to slip back from a 0.5% rise in July to come in at 0%. The numbers will also give some clues as to whether or not the new “funding for lending” is having an effect now that it is up and running and is starting to percolate down.
In the US the manufacturing sector continues to show worrying signs of weakness which was starkly illustrated on Friday with the latest Chicago PMI numbers for August which slipped sharply into contraction territory from a reading of 53 in July, to 49.7.
With that in mind today’s ISM September manufacturing number takes on even more importance with the worry that they could show a fourth monthly contraction in a row. The expectation is for a flat 50 reading, an improvement from 49.6 in August, but given Friday’s shock fall in Chicago that could be optimistic.
EURUSD – for three successive days the single currency has so far managed to hold above the 200 day MA at 1.2830. This remains the key level in order for a move lower.
It needs a push below 1.2830 to retarget the 1.2650 level with key trend line support from the 1.2045 lows now at 1.2660.
The bigger trend line resistance level remains from the 1.4940 highs at 1.3195, but to even get here we need to see a rebound beyond last week’s highs at 1.2990.
Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD – cable saw a break below the support at 1.6140/50 late on Friday suggesting that we could well see move towards trend line support at 1.6070 from the August lows at 1.5490. A move below here targets a move towards 1.5915, 38.2% retracement of the up move from 1.5270.
It needs a move above resistance and last weeks high at 1.6310 to target a move towards 1.6590, last year’s August high.
Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5630 from the 1.5240 lows.
EURGBP – Friday’s rebound stalled at 0.7990 before slipping back. Any declines should find support at last week’s low at 0.7925, as well as trend line support from the 0.7755 lows at 0.7905.
To restore upward momentum we need to see a bounce back through the 0.8050 area to retarget the highs two weeks ago.
USDJPY – Friday’s daily bullish engulfing candle changes the outlook slightly; however we could well slip back towards last month’s low at 77.25.
To stabilise in any meaningful way we need to take out trend line resistance at 78.95 from the 20 April highs at 81.80, as well as the 200 day MA at 79.32. The 200 day MA at 79.32 remains the main obstacle to a return towards the highs in August at 79.70.