Global financial market witnessed another eventful week due to elections in Greece. Meeting of G-20 member countries in Mexico and FED’s monetary policy announcement (MPS) that kept financial market on its toes as trading activities around the world remained choppy.
Greece election result gave sigh of relief after voters showed confidence in electing the pro-bailout supporters easing fear of imminent Greece exit, which also means that with the continuation of its austerity policy, Greece will be eligible for next bailout package.
The risk was that Greece departure would have catastrophic impact on all ailing European economies that could have potentially dragged the global economies. But Greece story is not over as yet and has unending bumpy and risky road ahead.
As I have pointed in my various columns that Greece is one of the European issue and hence, the respite was short lived as Italian bond yields too soared sharply to record high.
Spain’s banking sector demand for funds immediately popped-up, as the country still requires huge amount of money for capitalization that helped surge in 10-year Spanish bond yield beyond 7 pct for the 1st time. Recent private auditor’s reports suggest that Spain’s banking sector will requires more funding than earlier though that could exceed by another USD 60-80 billion. It is expected that today (Monday) Spain will apply for bank bailout money.
In another event in a G-20 meeting last week, the outcome was not productive. French President Hollande did show his concern about high Spanish and Italian interest rate due to rising European bond yields, which is expensive to service debt. His fear would be that every European country is laden with huge debt and France too faces the European risk.
By mid-week market concentration diverted towards FED FOMC announcement, as continued disappointing US economic data raised hopes that FED could opt for QE3. But FED extended its Operation Twist (OT-2) program until December, to swap USD 267 billion short term securities with long-term debt.
Though FED avoided injection of excess liquidity though QE3, but the language used in July MPS is Dovish. It has slashed its growth and unemployment projection by 0.5 pct and 0.2 pct respectively, though inflation fear has receded that has been projected downward in a range between 0.3 to 0.5 pct.
Since the downward revision of economic projection is significant, the US economy is at huge risk of prolong slowdown. One thing is for sure that FED cannot do anymore twisting because it does not hold short duration securities. To go for OT-3, FED has to use its USD 580 billion by selling three years to six year bond. In this scenario QE3 looks a better option. Hence, it has once again raised a hope that if FED needs to act it will for quantitative easing in its August FOMC.
Interesting thing to note is that before July FOMC announcement there was lot of talk about the speeches made by FED 12-member voting officials with many interpreting that the consensus is that half supports OT-2 and the other half is in favor of QE3, but out of 12 votes 11 preferred Operation Twist over quantitative easing.
What does this indicates? To me the message is very clear. FED official will be keenly watching the US economic data. Strong data will help in avoiding QE3, but weak data too will not encourage FED officials to go for QE3 because they will be only couple of months away from US elections. FED cannot afford siding with any party and since QE3 could be beneficial for the government, FED will stay cool. Perception is that Operation Twist only helps Stocks and bond market, whereas, Quantitative Easing not only helps US Dollar, stocks, bond and commodity market, it may also help new business openings that could create jobs.
During this period FED will be closely watching US economic data, as there is only one unemployment report, which I am expecting to show improved result. But bad data will surly keep the market nervous.
Important event of the week is European leaders meeting to discuss/resolving Euro-zone issues. But global economic data will guide the market about the business trend, on Monday there are minor European data, which may not matter much, but US New Home Sale data will be 1st guideline of the week about last month’s single and family home sales. On Tuesday there are couples of US economic data that may not have much impact on the market. On Wednesday, Germany and UK will be releasing its data, which is mild, but in the early US opening session Durable Goods Data may provide market the required spark. On Thursday European data will keep market on its toes as German unemployment rate will tell provide clues about the economic activity in Germany and the in next 35-minutees UK will announce its GDP and Current Account Data, which may provide more direction. Friday will comparatively be a quite day as there will be no release of any major economic data.
Monday JunE 18-22 -Last Week
GOLD @ $ 1626.60 = Poor US economic data helped Bullish sentiment to dominate that kept gold on the up against my expectation and bounced back from $1,585 to hit the highs of $1,633.30.
Gold has so far struggled around $1,630's as it plunged after hitting the top. I am expecting wide trading range until FED announcement, but prefer to pick the top selling around $1,640, as I am not expecting a break of $1,650 before FOMC announcement, break could risk for $1,675.
However, I am expecting upside gold rally to ease off by weekend and may not be surprised to see a fall and break of $1,590, if surrenders for more losses. If gold hold below $1,720 my medium-term target is $1,442
EURO @ 1.2638 = It was another successful week as we saw euro breaking 1.2560 to test the top of my given range 1.2660.
This week volatile market condition could dominate due to some of the major happening in Europe and FED FOMC announcement. Therefore, the key level to watch is 1.2720, only break of this level would encourage euro bulls for some more gains that should find top around 1.2850-75 zones. If euro jumps, I will wait to pick the top as the currency may not enjoy strength for longer duration.
While, on the downside all eyes should be on 1.2520, if this level surrenders market is likely to witness more losses with next support around 1.2340. Ranges for the week 1.2310 - 1.2890
GBP @ 1.5698 = Well the up move has extended my target of 1.5640, which occurred in late New York market thin marker. I am not too optimistic about Pounds further gain beyond 1.5780 and likely to fall if 1.5620 surrenders for 1.5520-50 zones. Ranges for the week 1.5480 - 1.5820
JPY @ 78.69 = Last week I warned that Yen needs to break 79.80 for more losses before making gains. The loss could not extend beyond 79.70 resulting sharp gain as per expectation hitting target 78.80.
I would continue to focus on same lines as I am expecting a strong resistance around 77.80, which may not be tested. A break above 79.40 would encourage for a test of 79.80 zones before making another surge towards 78.20. Ranges for the week 77.50 - 80.20
CHF @ 0.9499 = Swiss Franc may test crucial resistance level of 0.9470, but break of this level could risk for a test of 0.9360. On the downside a push below 0.9560 could further weaken the currency that may test 0.9620. Ranges for the week 0.9350 - 0.9640