Friday 22^nd June 2012

Bank downgrades set to weigh on markets

By Michael Hewson Senior Market Analyst at CMC Markets UK

Yesterday saw the preliminary findings of the long awaited independent Spanish bank’s audit report into the nations banking sector. Initial findings estimated that in a worst case scenario banks would need as much as €62bn, assuming a 6.5% GDP fall over three years and a further 26.4% fall in house prices, though there is some scepticism as to the accuracy of the numbers given that the data used was data obtained from the Bank of Spain and not through examination of the banks books themselves.  A more thorough second audit should be done in time for the end of July and a final one in September. Expectations are for the Spanish government to request the funds for the banking bailout possibly as soon as today, according to French Finance minister Moscovici. The funds are likely to come from the EFSF initially, given that the ESM is still not ratified in Germany.

Banks elsewhere in Europe and the US were also on the receiving end of bad news yesterday after ratings agency Moody’s downgraded a whole raft of banks cutting Barclays 2 notches and HSBC, RBS and Lloyds one notch each. French, German and Dutch banks were also downgraded with the common denominator being stresses caused by the deteriorating situation in Europe.

 The continuation of the two day Eurogroup finance ministers meeting is expected to discuss the details of any Spanish banking bailout as well as whether to allow Greece more latitude with respect to its adjustment program. The IMF also weighed in, with Christine Lagarde urging EU leaders to channel funds directly to banks and called for the ECB to cut rates saying the future of the euro was at stake. Later today in Rome German Chancellor Angela Merkel is due to meet Italian PM Mario Monti, French PresidentHollande and Spanish PM Rajoy to discuss the plan that has been mooted to use the EFSF and then the ESM when it becomes available, to cap bond yields by buying the debt of countries that are attempting to comply with reform programs. Germany is currently opposed to such a plan due to concerns it will ease the pressure of reform in the affected countries. It will be interesting to be a fly on the wall given that Mr Monti is fast losing support in Italy, due to the speed of his reform program which is causing mutterings of discontent from all sides. In any case the German Chancellor’s room for manoeuvre is limited, given the questionable legality of any form of debt mutualisation under German law, and voter discontent at home. The German constitutional court also threw a spanner in the works by insisting on reviewing the text of the legislation before allowing ratification, a delay which could add several days to the ratification, which is scheduled for 1^st July.

 Economicdata in Germany is also starting to deteriorate as evidenced by yesterday’s sharp drop in June manufacturing PMI to its lowest levels for over three years to 44.7. Today’s June IFO is expected to be similarly disappointing, following in the footsteps of the ZEW earlier this week with all measures expected to weaken, with expectations set to weaken to 99.8 from 100.9, while the current assessment is expected to decline from 113.3 to 105.6.

 EURUSD – the failure to move beyond the 1.2750 resistance area saw the euro sell off yesterday and break below the trend line support at 1.2590 from the lows this year at 1.2290. This break now opens up the possibility of a move towards the lows of last week at 1.2430/40, on the way back to the 1.2290 area.The primary objective still remains the 2010 post first Greek bailout lows at 1.1880, but we could see a bit of a short squeeze first.

 GBPUSD – it would appear that the downside pressure looks set to win out with the failure to close above the 200 day MA at 1.5755 this week. The failure at 1.5780 was a key level given it was the 50% retracement of the entire down move from the 1.6305 highs in April to the 1.5270 lows in June. The break below support at 1.5620 yesterday now opens up a move back towards the 1.5470/80 area. Only a close above 1.5755, the 200 day MA and through 1.5780 targets 1.5910 which would be the 61.8% retracement of the same move.

 EURGBP – downside pressure continues to dominate with trend line support from the recent lows at 0.7950, at the 0.8000 level which continues to limit the downside here. The 55 day MA continues to act as a cap on the upside at 0.8105.  The key resistance remains at this months highs at 0.8150 and is the main obstacle to a move towards 0.8200, the trend line resistance from the 0.8830 highs last November. If we break below the recent lows at 0.7950 then we could well be set for the move towards 0.7845 and the November 2008 lows.

 USDJPY – the break above the 79.80 level yesterday once again brings the 80.40 resistance level back into play. Yesterday’s move also saw the US dollar above the 55 day MA for the first time since the end of April.The 79.80 level should now act as support on the downside, with the 200 day MA at 78.80.The weekly close remains important here and a close above the cloud is needed to reboot the bullish US dollar scenario.

Equity market calls

 FTSE100 is expected to open 55 points lower at 5,511

 DAX is expected to open 58 points lower at 6,285

 CAC40 is expected to open 29 points lower at 3,085

 FTSEMib is expected to open 126 points lower at 13,625

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