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Bailout fizz quickly forgotten as Italian and Spanish yields rise

CMC Markets

Yesterday’s market reaction to the news of the weekend bailout of Spanish banks soon fell foul of the small matter of detail, or rather the lack of it with respect to where the bailout money would come from, as EU leaders continue to give their best impression of blind men groping around in the dark for a solution to the debt problems afflicting Europe. It remains unclear whether the funds will come from the soon to be wound down EFSF, or the yet to be formed new bailout fund, the ESM, which would subordinate existing bond holders. Reports last night that EU leaders were reportedly discussing capital controls, as well as the temporary suspension of the Shengen treaty in the event of a Greek exit, helped jangle nerves further. As with everything in Europe local politics continues to be the main obstacle to any quick solution and the deadlock is now threatening to drag Italy back into the mire as bond yields on the Italian 10 year pushed back above 6% to the highest levels this year, threatening to drag Europe’s third largest economy back in to the fire, which it thought it had escaped at the end of last year. With Spanish 10 year yields back above 6.5% on subordination fears, even with the cheaper bailout funds for its banking sector the Spanish government still has the small matter of funding its spendthrift regions, against a backdrop of an economy in recession and rising unemployment. Given that this bank bailout is likely to add over 10% of GDP to Spain’s debt pile it won’t be long before the Spanish government itself could find itself having to ask for a bailout as well, with all the conditionality that would bring with it. In a follow-up to last week’s downgrade of the Spanish sovereign, ratings agency Fitch downgraded Spain’s two biggest banks Santander and BBVA two notches to BBB+ citing recessionary pressures over the next eighteen months. Moving to the UK last week’s decision by the Bank of England to hold fire on rates and further easing measures is likely to come under further scrutiny today with the release of the April manufacturing and industrial production data. Though PMI data since the beginning of this year has been broadly positive, the ONS data has been consistently lacklustre painting a completely different and gloomier picture of the UK economy. Today’s data is unlikely to be any different with expectations of a decline of 0.1% in manufacturing data, down from a rise of 0.9% in March, while a rise of 0.4% is expected in industrial production data, up from a 0.9% decline in March. EURUSD – yesterday’s failure above to close above the 1.2630 level keeps the focus firmly on the downside and for a retest of the lows at 1.2290. Only above 1.2630 argues for 1.2820/30. In the middle there is support around the 1.2430/40 area, and last Friday’s lows. The primary objective remains the 2010 post first Greek bailout lows at 1.1880. It still remains highly likely we will see these levels, though we might also find some support around the June 2010 lows at 1.2150. GBPUSD – the failure to take out the 1.5610 area yesterday, failing at 1.5580 has seen the pound slip back. There is support around the 1.5420 area and this level needs to hold to prompt a rebound and move back towards 1.5610. The key question now is whether the key support between 1.5230 and 1.5260 and lows for the last nine months is able to hold or whether we see a sell-off on a break of this level towards 1.4950. Only a rebound through 1.5610 argues 1.5680 and then 1.5730. EURGBP – yesterday’s failure at the 55 day MA and trend line resistance from the February highs at 0.8504 at 0.8150 saw the single currency slide back sharply. Support can be found at the 0.8040 area and last weeks’ lows while a break below that opens up the May lows at 0.7950 once again.. If we break below these lows at 0.7950 then we could well be set for the move towards 0.7845 and the November 2008 lows. USDJPY – the key question since the June lows at 77.60 really surrounds whether or not we will see further yen strength, or whether we can now recover back above the 80.00 level and stabilise. The quick recovery back above the 200 day MA is a positive sign after this month’s sharp fall saw the US dollar just about hold inside the weekly Ichimoku cloud support. The key levels lie either side of the cloud extremities at 80.40 on the upside and 77.90 on the downside. Only a weekly close above the 80.42 cloud line would suggest a stabilisation in the dollar towards 82.00