Markets Are Waiting For A Euro Bounce …

The markets have had a risk off day at the start of a new week. A few things are weighing on sentiment: 1, concerns that Germany will not boost the size of the Eurozone’s bailout fund, 2, Spain – it still hasn’t requested formal bailout funds from the EU/IMF and 3, more bad news about Germany’s economy.

Spain back in the focus
This has all worked against the euro bulls, and EUR/USD fell to a low of 1.2890 in the London session. 1.2870 then 1.2830 – the 200-day sma – are key support areas from here. We tend to think that the euro won’t decline too far versus the dollar for a couple of reasons: 1, growing concern about the fiscal cliff in the US and 2, the prospect that the single currency could rally once Spain receives a bailout.

The 2013 budget is presented to the Spanish Parliament on Friday, this is important to determine: 1, the government’s forecasts for growth and revenue and 2, if missed fiscal targets for 2012 could impact fiscal targets for 2013. If Spain’s public finances are untenable there may be no option for Madrid other than to apply for a bailout. This could cause a rally in the euro, in our view, as it would trigger the ECB’s bond-buying programme the OMT, effectively making the ECB the lender of last resort. The question that traders need to know is: when will Spain request the bailout?

We think it may wait until after the Eurogroup finance ministers’ meeting on 8th October. Apparently Spanish officials are still in discussions with Europe to come up with an “economic programme” that would enable Spain to request a bailout without being slapped with more austerity – a bit like conditionality –lite. Spanish officials may also decide to wait for regional elections in mid-October to pass before requesting aid, so there might be a few weeks of uncertainty for the single currency.

German growth remains a concern
Although we think downside in the euro is limited we also think upside will be capped. We may see EUR/USD get up to 1.33 on the back of a Spanish bailout request, but we don’t see gains being extended from there because of the weakness of economic growth in the region. The weak growth story has been a fixture of the Eurozone for many months now; however, the market is particularly sensitive to German data misses as Berlin remains the currency bloc’s pay master.

The IFO survey, released this morning, fell relative to expectations for September, declining to 101.4 from 102.3 in August, the lowest level since late 2009. The components of the index were also weak, which suggests that the German economy may not have bottomed in Q3 and there may be further weakness in the important industrial sector in Q4.

German politicians have also added to the jitters in the markets today. Firstly, a member of Merkel’s party said that Berlin was getting fed up with waiting for Spain to apply for a bailout. Secondly, German officials denied that Berlin was about to approve an extension to the size of the ESM rescue fund to a whopping EU2 trillion. This triggered the risk off sentiment in European markets today. However, Germany did not dismiss an increase in the size of the fund outright saying that a decision had not been made.

Essentially with a lack of economic data at the start of this week markets will be driven by news-flow and could be fairly sensitive to headlines and comments from politicians. At this stage it appears that Spain and the Eurozone may dominate things.

IPhone 5 sales disappoint
We have mentioned in recent weeks that Apple is a bit of a leading indicator for stock markets as it is one of the largest, most powerful consumer companies in the world. Thus, news of its new iPhone 5 missing sales estimates on its inaugural weekend could be adding to negative sentiment in the stock markets today.

The SPX 500 looks toppy around 1,450, however US stocks have largely avoided the same pace of declines witnessed by other markets in recent days for example commodities and risky FX. Thus, US stocks could be at risk from a sell off this week if sentiment in the financial markets remains sour. 1,405 – the 50-day sma - then 1,370 are key support levels for the SPX 500.

One to Watch: Brent crude
Commodities are having an interesting time of late. Brent crude has sold off today along with other risky assets and in line with a rising dollar. It also failed to crack the $111.90 level – the 200-day sma, which is significant and suggests that momentum, is not on the bulls’ side. Added to that, plentiful oil stocks in the US, combined with Saudi Arabia announcing it would pump more oil increases the downside risks to the oil price in the near-term. We look for a decline to $106.40 – the 100-day sma – then to $105 in the near term. Resistance remains $112.

Brent crude oil: daily chart
Source: Forex.com

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