Spread Betting: Germany Set to Feel the Pressure After Italian and Spanish Downgrades

Posted on | January 23, 2012 |

The optimism in the spread betting markets about the likelihood of a Greek debt deal at the weekend proved, as in numerous instances before it, somewhat misplaced.

On Saturday the representatives of Greece’s private creditors left Athens with no agreement being reached. It is reported that they are not willing to countenance any more than a 65%-70% loss on the current value of Greek bonds, which in any case will unlikely be anywhere near enough to tackle Greece’s rising debts.

Let’s not forget that we started out at a 21% haircut at last July’s EU summit and the number has kept going up, at the same rate that Greece’s economy has been spiralling down.

It remains unlikely that a deal will be reached by the end of today’s EU finance minister’s summit, as originally hoped.

Even so Greek officials remain confident that a deal can be reached by the next EU summit on 30th January but time is short, given the deadline of a €14.5bn bond repayment in March.

With fears of an imminent default continuing to rise in the event of no agreement, there is also the matter of Greece’s failing finances.

The troika report on deficit reduction is once again expected to show that the Greek government is behind the curve on that. The likelihood is that the troika could well ask that the Greek government implements further austerity measures in exchange for the next €130bn bailout.

With the Greek economy already getting crushed under the weight of fiscal austerity any call for further cuts could well be the straw that breaks the camels back.

In addition to discussing the second Greek bailout, today’s Eurogroup finance ministers meeting is set to make further tweaks to the fiscal compact agreed on the 9th December.

Last weeks downgrade of Italian and Spanish GDP growth by the IMF, with deep recessions predicted in both, has seen the leaders of both countries look to increase the pressure on Germany and the ECB.

Both leaders have requested a drop in their opposition to an increase to the new (ESM) European Stability Mechanism, as well as full scale QE and steps towards full scale fiscal union, a call so far fiercely resisted by both parties.

What Germany can’t avoid though is that after this month’s European downgrades its role is set to become even more crucial for the future of the European currency.

As the largest triple “A” country left in Europe further pressure is unlikely to diminish and it will become a matter of when and not if, that the Germans will have to decide whether or not they want to continue to pay the price for the survival of the euro.

France and Germany will both hold short term bond auctions today with Germany expected to tender €3bn in 12 month bills. France will also hold an auction of €4.5bn 13 week, €1.6bn 24 week and €2.2bn 50 week treasury bills.

EURUSD

 
The failure to get through the 1.3000 level has seen the single currency slip back sharply. Only above 1.3000 argues for 1.3250 and an even sharper squeeze.

If we move back below the 1.2850/60 area, then we’re back looking at a retest of the lows just above 1.2600.

The key support remains near to the key 1.2600 level that represents the 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. This support level also coincides with the August 2010 lows at 1.2590.

A concerted break below this level would target 1.2480, the July 2010 lows and then on to 1.2000. The key barrier on the upside remains the resistance around the 1.2870/80 or last weeks highs.

GBPUSD

 
The pound closed last week finally hitting the 1.5570 area, after breaking the 1.5500 area. The 1.5500 area should now act as support on any move back lower, which if broken, could see a move back to 1.5360.

While below the 55 day MA at 1.5740 pressure remains on the downside.

The 1.5270 support area remains a key level and obstacle to further sterling declines towards the 1.5190 level, which remains a key support area given that it is 61.8% retracement of the 1.4230/1.6745 up move.

There is also support at 1.5125, the July 2010 lows, a break of which targets 1.4980.

EURGBP

 
Last week’s failure at the 0.8370/80 area saw the trend line resistance do its job and keeps the focus firmly on the downside, especially now we have broken back below the 0.8310 level which keeps the focus back towards the lows at 0.8220 from two weeks ago.

This keeps the focus on the September 2010 lows at 0.8200/05, which remain the key obstacle to further declines towards the 2010 lows at 0.8065.

USDJPY

 
The USD/JPY continues to find support above the 76.50 area trading steadily above this level. The resistance remains at the confluence of the 55 day MA at 77.55 and trend line resistance at 77.70 from the 2007 highs at 124.15.

The key support remains around the November 2011 lows at 76.50 which prompted last week’s pullback. Only a move and close below 76.50 opens up the all-time lows at 75.30.

Equity market calls

 
FTSE 100 is expected to open 22 points higher at 5,752.

DAX is expected to open 13 points higher at 6,417.

CAC40 is expected to open 8 points higher at 3,329.

FTSEMib is expected to open 36 points higher at 15,668.

 
 
Please remember that Spread Betting, FX and CFDs are leveraged products and carry a high level of risk to your capital. It’s possible to lose more than your initial investment. These products may not be suitable for all investors, please ensure you understand the risks involved and seek independent advice if necessary.

Spread Betting, FX and CFD comments by Michael Hewson, Market Analyst, CMC Markets.

The above should not be construed in any circumstances as a recommendation or offer to sell or recommendation or solicitation of any offer to buy any security or other financial instrument.

Neither CMC Markets nor Spread-Betting.org warrant or represent that the material is accurate, complete, not misleading, or fit for the purpose which it is intended and it should not be relied upon as such.

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