Markets are expected to track sideways this morning as investors continue to cast doubt over the strength at the start of this week and year.
A little bit of doubt crept into investors’ minds yesterday after the ECB revealed that a record amount of funds had been deposited with them overnight and the share price of Italy’s largest bank hit its lowest level since March 2009.
The fact that such a huge bank is struggling to recapitalise after the ECB pumped all that money into the markets only a couple of weeks ago raises the same old fears about the Europe wide banking system. We maybe in a different year but we face the same problems in 2012 as we did in 2011 and even Germany isn’t immune to being targeted.
Yesterday their bond auction was well subscribed but the yield just crept upwards. Today the bond auctions continue with the focus being France. Europe’s second biggest economy is under the spotlight today as they face exactly the same problems as the peripheral countries. France suffers from too much debt and a slowing economy, at a time when they are introducing austerity measures of their own. Their triple A credit rating is also under severe scrutiny from the rating agencies who have already fired some shots across their bows at the end of last year. A downgrade would be the next step towards the slippery slope for France as it would cause their borrowing costs to spike and making their job of getting the house in order even more difficult.
Investors will also want to hear how much was deposited at the ECB overnight just as they have in recent days. This is becoming another focal point for the markets as it is acting as a bit of a fear gauge. The more cash held with the ECB earning nothing at all, the more worried banks are about their own counter parties. Out of all this the UK continues to benefit as our own gilt market benefits from risk adverse investors helping to drive the yields on those bonds lower. A good result for the Coalition who pride themselves on our low borrowing costs, which are almost as low as Germany’s and indicate the confidence in their austerity plans.
Yesterday I mentioned that the highlight of the day on the economic data front was the ADP private payrolls, which are in fact due to be released today. At the same time we get the weekly initial jobless numbers which have recently shown clear signs that employment in the US is accelerating and the same is meant to been seen today. Then after that the US services data is released which is also expected to remain above the 50 level and even rise, showing expansion for their services sector. Before all the US data however we get our own release of PMI services numbers. Here we are expected to see a decline from 52.1 to 51.5, so still above the critical 50 mark. In the past few months this number has surprised to the upside continually, with expectations for declines, but the number usually surprising to the upside. Today might be no different as we’ve seen manufacturing and construction PMI so far this week come in better than expected. However, considering all the gloomy surveys that have been seen in recent days showing that business confidence really is very low at the moment, at some point the services sector will be affected and we may get the first indication of that today.
The concerns over the eurozone that crept back in yesterday caused EUR/USD to snap back on its gains and as a result it dipped back below 1.3000 after a brief visit above it. At the time of writing we’re at 1.2930 and traders will be watching key levels to the downside as the single currency remains the dog of the FX markets. Near term support is seen at 1.2900 and 1.2880, meanwhile resistance is seen at 1.3045/75.
The yellow brick has done well out of the last few days and its dip below 1600 falling the crash back in September and then December as a bit of risk appetite for the precious metal returns and it also recovers some of its safe haven status. Up again this morning at 1621 the levels the nulls will be watching to the upside are 1634/40 and to the downside 1609/1594.