Daily Report: Sentiments Stabilized Temporarily as Italy Seeks China Buying

Markets sentiments stabilized a bit over night on talks that Italy, after having a poor bill auctions yesterday, was soliciting China for buying the country's debts. It's reported that Finance Minister Giulio Tremonti met with China Investment Corp sovereign fund's chairman on the possibly of purchase by the fund. A number of Chinese officials are believed to be involved in the conversation, including those from China's ambassador and the State Administration of Foreign Exchange. It's believed that around 4% of Italy's EUR 1.9T of debt is being held by China for the moment even though the exact amount is unclear. EUR/USD turned into range trading after breaching 1.35 level briefly yesterday. Meanwhile, global equities recovered mildly, following late rebound in US stocks. Italy will be selling as much as EUR 7b of bonds today including EUR 4b of a new benchmark 5-year bond The country as completed around 70% of its debt financing this year and is looking at selling another EUR 70b of bonds for the rest of the year to cover its budget deficit and other redemptions.

But after all, sentiments remain vulnerable as all eyes and all minds are still on the Greece situation. Default risks of Greece, as implied by 5 years CDS, reached as high as 98% while yield on 2 year-notes jumped above 70%. Fear of contagion also sent CDS on some eurozone countries to record high, including Portugal, Italy and even France. In the medium term, concerns of impact of austerity measures on Eurozone economy is also weighing on sentiments. ECB Trichet tried to comfort markets by saying that "we don't see a recession, not at all, but we see a slowing down in comparison with what has been observed." Also, Trichet pleased to provide "liquidity to banks as required". But there was clearly not much reaction to his comments.

On the data front, Australia NAB business confidence dropped sharply to -8 in August. NAB said that the result reflects "heightened global uncertainty, large falls in equity markets and the fear of debt market contagion." Though, "confidence levels remain significantly above global financial crisis or recessionary lows." UK RICS house price balanced dropped to -23 in August. RICS said that the indicators suggested "demand for homes remain broadly steady, albeit at relatively low levels, despite the renewed bout of economic gloom", but "the risk is that the worsening economic picture will gradually begin to have a more material impact on sentiment and discourage potential house purchasers".

Looking ahead, UK CPI will be a main focus in European session. Headline CPI is expected to climb to 4.5% yoy in August with core CPI slightly down to 3.0%. UK Chancellor Osborne said over the weekend that he saw no barriers to a second round of quantitative easing from BoE. But the bank might still opt to see CPI really peaks first before acting. Other data to watch today include US import price index and Fed budget statement.

AUD/JPY is so far one of the weakest pair this week, obviously on risk aversion. The development confirmed that corrective rebound from 76.50 has finished at 82.80 already after failing to sustain above 55 days EAM on multiple attempt. Near term outlook is now cautiously bearish for a retest on 76.50. Break will resume whole fall from 90.01 towards 74.02 support and below. A break of 80.61 resistance is needed to invalidate this case or we'll stay bearish even in case of recovery. 

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8555; (P) 0.8596; (R1) 0.8664; 

EUR/GBP recovers mildly after dipping to 0.8529. Touching of 0.8632 minor resistance, with 4 hours MACD crossed above signal line, suggests that a temporary low is formed and intraday bias is turned neutral for some consolidations. But recovery is expected to be limited below 0.8732 support turned resistance and bring fall resumption. Below 0.8652 will extend the whole decline from 0.9083 to 100% projection of 0.9083 to 0.8642 from 0.8884 at 0.8443 next.

In the bigger picture, price actions from 0.9799 (2008) should be unfolding as a consolidation pattern in the long term up trend. The first leg is completed with three waves down to 0.8067. Second leg should also be finished at 0.9083. Fall from 0.9083 is treated as the third leg and should now target 0.8067 first and possibly further to 61.8% projection of 0.9799 to 0.8067 from 0.9083 at 0.8013 (which is closes to 0.8 psychological level). Nevertheless, we'd expect strong support from 0.7693/8186 support zone to contain downside to finish off the consolidation. On the upside, break of 0.8884 resistance is needed to invalidate this view or we'll stay bearish now.