Italy bank

While we may have seen new record highs last week for global indices including the DAX and S&P 500, there are worrying signs that valuations continue to look a little stretched at a time when concerns are rising that we could be seeing some signs of plateauing in global growth prospects.

Rising production and concern about slowing demand in Asia, has contrived to push oil prices sharply lower in the past few weeks, despite OPEC’s recent fudged decision to extend their output freeze until March next year.

US shale producers continued to add rigs for the 23rd week in succession, with 758 now compared to 428 a year ago, while the exclusion of Nigeria and Libya from the OPEC production cap has seen output barely budge since November last year.

It’s quite a contrast to the beginning of 2017 when optimism was high that the agreement reached a few weeks earlier, would help keep a decent floor under the oil price and as we come the end of the first half of 2017 OPEC producers are having to face the prospect of an oil price nearly 20% below where they thought it would be.

It is this concern about falling inflation that is making investors nervous at a time when central bankers seem intent on acting to start pushing rates back up. In the past couple of weeks we’ve heard from central bank officials talk about the prospect of tighter policy with Fed officials still talking up the prospect of a third rate rise by the end of the year, while last week the markets complacency about a UK rate rise was given a jolt by the sudden about turn by Bank of England chief economist Andrew Haldane’s sudden conversion to a more hawkish stance, adding a new dimension to the 5-3 split on the recent Bank of England decision to hold interest rates.

We’ve also seen a re-emergence of optimism about the Eurozone economy in recent weeks with a strong rebound in economic activity across the big four of Germany, France, Italy and Spain, as subsiding political risk and a slow decline in unemployment has boosted sentiment.

This recent optimism is likely to face a renewed test this week in the face of the weekend announcement from Italy that tore up the rule book around the recapitalisation of failing banks, and threw what was left of the move towards a European banking union into much greater doubt.

On January 1st 2016 new EU bail in rules stipulated that before a single euro of taxpayers money could be used to bailout a failing bank that share and bond holders should absorb the cost, to the tune of up to 8% of the total liabilities. As with most things in the EU it didn’t take long for this approach to hit the buffers on the altar of political expediency, and next year’s Italian elections. The rules also stated that national authorities would no longer be responsible winding up failing banks, and that this would be transferred to the Single Resolution Mechanism.

The failure and bailout of two Veneto based lenders with Italian taxpayer’s money has seen Intesa Sanpaolo acquire the good assets of the failing banks for €1, while leaving the bad assets on the books of the Italian government, to the tune of about €17bn. In addition the government has pledged to offer guarantees up to the value of €12bn for potential losses, while senior bond holders and depositors are protected.

So much for the so called new single European rule book and the much vaunted European Banking Union. It appears that there is one rule for Spanish banks, and the recent rescue of Popular Bank, and another for Italian banks, as Europe continues its "pick and mix" approach to dealing with its failing banks.

Let’s hope the Italian government has deep pockets given that this particular bailout is a fraction of the non-performing loans in the Italian banking system, of which it is estimated there are about €300bn.

Forex snapshot

EUR/USD – the range trade remains in play with support just above 1.1100 and resistance up at 1.1300. If support near 1.1100 gives way we have the potential to open up a move lower towards the 1.0900 area, with the 1.1020 area the first port of call. This would signal a triple top reversal with resistance back up towards the 1.1300 area

GBP/USD – having managed to hold above the 1.2580 area and 200 day MA at 1.2550 the risk of a rebound back through 1.2820 remains a possibility. The 100 day MA at 1.2630 should also act as support. A slide back below the 200 day MA could well open up the 1.2380 area again.

EUR/GBP – the previous highs at the 0.8865/70 area remain a key resistance and the main obstacle to a move up to 0.8920. While we remain below this key level we could well head back towards the 0.8720 level.

USD/JPY – the inability to move above Kumo cloud resistance at 111.80 could well prompt a drift back towards 110.60 and the 200 day MA. A break through resistance opens up the potential for further gains towards the 112.40 area, and 113.00. 


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