A sell-off in US treasuries yesterday saw US stocks slip lower, as yields started to push higher again, the 10 year closing at its highest level this year. European bond markets also started to succumb to the same selling pressure that we saw in the middle of last week, with German bunds also coming under pressure again, on receding deflation concerns, and this looks set to see a weaker European open equity market open this morning. Just before Easter in early April the European Working Group gave Greece a six day “or else” deadline to present reform proposals in order to reach a funding agreement at the April 24th finance ministers meeting. Since then we’ve had a series of these missed deadlines which have come and gone, with the end result that neither side now appears to take them seriously, and markets are also paying little heed to them either. This could well present a problem in that, if or when a default does arrive, it could happen very suddenly when Greece suddenly discovers that the money finally has run out, and the cupboard is finally bare. Over the last few months we’ve been warned several times that Greece was about to run out of money, only for government officials to somehow manage to come up with the funds at the last minute with the €750m which was due to be paid to the IMF today, paid yesterday. Now that Greece has made this payment this particular narrative is starting to become rather tired and at some point this train will hit the buffers, and the money really will run out, while investors continue to bet that one side will eventually blink and pull back from the brink. The reality is that neither side seems in the mood to back down, making capital controls and a default more or less inevitable, despite assertions that progress is being made. It is certainly harder to make the argument that Greece’s debt is anyway sustainable at current levels which makes the IMF’s future participation that much harder to justify unless there is some form of debt restructuring, a move that is a “red line” for EU creditors. With impatience and exasperation growing by the day on the part of certain German officials, including finance minister Schaeuble, there has been talk that pressure is being put on Chancellor Merkel to drop her opposition to cutting Greece loose, while all of a sudden Germany appears to have dropped its opposition to a Greek referendum, after being fiercely opposed to one all the way back in 2011. This change of position suggests that Germany is relaxed about the outcome, whichever way it goes, and that Europe is sufficiently firewalled in the event of a vote to leave. This still presents a massive problem, assuming any referendum goes ahead, and Greece votes to stay in the euro. The events of the last few weeks have eroded goodwill and trust to such an extent between the various parties, it is hard to imagine why anyone would want to pony up any more cash for a third bailout, which Greece will need, given the events of the last few months. In the wake of last week’s surprise UK election result we will be getting the latest industrial and manufacturing production numbers for March. The PMI numbers for Q1 were, by and large fairly positive, slowly improving from January to March. The problem is that the PMI’s very rarely a good guide to the ONS data, and expectations here are similarly low key. Manufacturing production for March is expected to decline slightly from 0.4% on February to 0.3%, while industrial production is expected to decline from 0.1% to 0%. This is despite both PMI measures showing a significant improvement in economic activity in both sectors for that period. EURUSD – the euro continues to look a little stodgy but while it remains above the 1.1050 break out level the risk remains for a return towards the highs last week at 1.1400, and the 1.1500 level. A push below the 1.1050 level could see a sharp fall towards 1.0900. GBPUSD – continues to look well supported having pushed above resistance at 1.5570, 38.2% retracement of the down move from 1.7190 to 1.4565. The 200 day MA is also a key barrier at 1.5630. We need to hold above 1.5220 to push on otherwise we could be at risk of a fall back towards 1.5000. EURGBP – continues to look weak, heading towards 0.7155 trend line support from the March lows. As long as we can hold above here the risk is for a rebound back towards 0.7220, and behind that at the 0.7380 level. USDJPY – the ongoing failure to overcome the 120.70 level has continued to weigh on the US dollar. In the short term it looks range bound with strong support just above the March lows at 118.30, while at the same time the rebounds keep getting shallower. We need to see a break above 120.70 to mitigate the downside risk of a move towards 116.50. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Bond sell-off set to see weaker European open
20:00, 11 May 2015