Following a relatively positive session for European stocks yesterday, the enthusiasm did not carry through to US markets which registered losses overnight. Commodity prices dropped led by gold while equity volatility rose.
Marginal progress at the meeting of European Finance officials, with the decision to furnish Spain with the first EUR 30 billion of funds for its banks, helped sentiment in Europe. Moreover, officials edged closer to purchasing bonds in the secondary market by agreeing a separate accord to use the European Central Bank (ECB) as a buying agent for bond purchases by the bailout funds.
However, questions such as how Greece would get through next month’s bond redemptions following a delay in a loan tranche for the country were left unanswered while the timing of setting up a single banking supervisor was also unclear. Meanwhile, the German constitutional court hearings on complaints about the ESM bailout fund mean that the ESM’s implementation continues to be delayed.
All-in-all, despite the marginal progress made yesterday there is a long climb ahead before markets can be appeased. Coupled with growing concerns about the US earnings outlook following several profit warnings by US companies market sentiment will remain fragile, with little headway likely for risk assets. Hopes of further Fed stimulus may offer some solace to markets but the reality is that the Fed is unlikely to be close to a further round of quantitative easing.
High beta / risk currencies remain pressured although it is notable that there is at least a little relative resistance from the likes of the AUD as indicated by the drop in EUR/AUD. European officials are doing just enough to prevent the EUR from gapping lower but not enough to enable the currency to rally. Having already dropped by around 3% against the USD since the start of the month EUR/USD looks set to test tech technical support around 1.2193 before next support around 1.2151.