Fundamentals:
The S&P suffered significant losses overnight with the main story dealing with Ireland and the possibility that similar problems will occur in other areas of the Eurozone. This is the “snowballing” effect that we discussed yesterday and the central issue of concern is the European debt situation. Now that Ireland has accepted its bailout, markets are starting to focus its attention on Portugal, where a similar strategy will probably be necessary at some stage.
From here, Portugal might follow Ireland’s lead and deny that a bailout is necessary. But if the market sees this and starts selling Portuguese bonds, the government will be forced to acknowledge that accepting a bailout from the EU/IMF is the only option.
If this does wind up happening in Portugal, it is significant for the region as a whole because there would be 3 countries EFSF fund that characterizes the European Union. This will put the AAA rating of the fund in danger, as the addition of a fourth country to this list violates its agreement rule. The Euro and equities in the region would probably be sold heavily if this came to fruition. Spain could be the next country to follow, so this is clearly not out of the realm of possibility. Many analysts suggest that the fund is not capable of supporting Spain in addition to the others, which would mean that Spain would be forced to enter into loan agreements with Germany and France. This would clearly not be risk positive for the equity markets.
German PMI data will be released at 8:30 GMT and a strong reading here could alleviate some of the downward pressure that we are seeing currently, as Germany is the largest and most influential economy is the Euro zone. Market consensus is calling for 56.8, up from 56.6 previously. Any number in the high 50s should give the markets a positive story to focus on and potentially push equities back into positive territory.
Technicals:
Commodities:
Gold is barely managing to make new hourly highs above 1369 and even though we have not seen any type of breakout activity, we are seeing pullbacks that are looking less and less forceful. The current bias is bullish as long as support at 1330 holds. Hourly RSI is bullish from mid levels and the next resistance overhead is at 1377.
Currencies:
The EUR/USD is continuing its downward slide, making consecutive lower lows on the hourly charts. We are very close to a test of the psychological 1.35 level and there is very little to suggest that we will be bouncing out of this area. Historical support does not come in until 1.3465 and the hourly indicators are bearish. Indicators will probably be oversold if we see a test of that support level, so the more adventurous traders can take a short term buy in that area with a close stop loss.
Stocks:
The S & P 500 has fallen back through support at the 1200 level. This is significant because of the failure at 1205, which is now where we are seeing a double top. Given the recent rally, we are looking at a very good sell area as long as major resistance at 1225 holds. The expectation here is for a further retracement, at least until Fib support at 1150 is tested. Daily RSI is at mid levels, so there is plenty of room here to extend to the downside.