With a light economic calendar in the U.S. during the coming week, investors’ attention will be focused on the European Central Bank's rate setting meeting on Thursday, with a quarter point hike of course widely expected. The key focus will be on whether the rate hike is the start of a cycle or just a one-of event. Stay tuned for the press conference!
Nowhere will this press conference have a stronger impact than in the PIIGS debt space. Indeed, with Ireland sinking and after Portugal’s pre-arranged “bridge financing” was quickly completed on Friday in order to avoid a liquidity crisis on top of a political one, the big question is whether Spain, Italy and others will have to follow with a bailout request precipitated by a possibly premature rate hike cycle.
Spain is clearly the next potential domino in this slow-motion crisis so it is useful to look at the spread between German bunds and 10-year Spanish Government bonds:
Source: Bloomberg - Spread between Spain’s 10 year Government bonds and German Bunds
Whilst the judge is still out, it is clear that the situation has somewhat stabilized for Spain. As a result of deep sacrifices and strong political will, the Spanish Government looks to be on the brink of breaking the negative spiral started roughly a year ago. a long term resolution to the so-called PIIGS crisis: Greece, Ireland and Portugal reschedule at some point whilst Spain, Italy & co. manage to stay afloat… Positive developments on this front should also help consolidate gains we saw both in Europe and the U.S. over the past week.
Indeed, after testing the 2,900 support at the beginning of last week, the Euro Stoxx 50 index travelled quickly through the 2,900 – 2,950 before managing to break resistance at 2,950:
Whilst the judge is still out, it is clear that the situation has somewhat stabilized for Spain. As a result of deep sacrifices and strong political will, the Spanish Government looks to be on the brink of breaking the negative spiral started roughly a year ago. a long term resolution to the so-called PIIGS crisis: Greece, Ireland and Portugal reschedule at some point whilst Spain, Italy & co. manage to stay afloat… Positive developments on this front should also help consolidate gains we saw both in Europe and the U.S. over the past week.
Indeed, after testing the 2,900 support at the beginning of last week, the Euro Stoxx 50 index travelled quickly through the 2,900 – 2,950 before managing to break resistance at 2,950:
On the back of this dynamic, 2,950 should become a pivot point for the market this coming week. Prior to the ECB meeting we would expect some consolidation however, looking for support at 2,930. Ultimately, we look at the 2,930 - 2,900 area as the stronger support zone whilst still aiming for 3,000 in the short term.
For the US, we have also clearly returned to the longer term trend we described in our last commentary (See stocks in the week ahead: Regroup, focus on the trend!). We would however also proceed a little cautiously as we close in on the recent market top.
Indeed, we expect strong resistance in the 1,340 - 1,350 area and would be surprised to see a clean break on the first attempt for the said area. Instead, a test of the 1,320 would seem more likely for the market to gather enough momentum for the big break. Ultimately, we look at the 1,320 - 1,300 as the stronger support zone in a still-bullish market.
We will therefore lean on this support zone to keep playing the market from the long side but lighten up positions acquired early last week on tests of the recent market top.
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