By Dean Popplewell
There is a sense of renewed optimism in capital markets this morning. Speculation of a Spanish application for a precautionary bailout is providing positive fodder for the EUR. Along with Moody’s reaffirming Spain’s rating at investment grade, this has been able to guide the single unit to test new weekly highs ahead of tomorrow's European Economic Summit.
Despite fears of an imminent cut, Moody’s maintained Spain’s government bond rating at Baa3, one notch above junk territory. The agency believes the measures that the Spanish government, the EU and ECB collectively have taken so far should allow the country to stabilize its ballooning debt levels. It seems that the opposition to a Spanish request for a second round of EU aid is withering; perhaps it’s clearing the way for the first use of the ECB bond buying program. Could this week’s Euro-summit potentially be a forum for a Spanish announcement? Prime Minister Rajoy keeps denying seeking any help.
Away from mainland Europe, BoE minutes this morning clearly show that policy makers are divided over the impact a new round of bond buying would have on the U.K. economy. Despite the difference, the MPC was unanimous in voting (9-0) to keep the target for the current bond buying program at +GBP375m and maintain its benchmark rate at +0.5%. Some members believe that there is further scope for QE to provide more stimulus to the U.K. economy. The opposition acknowledged that asset buying can lower longer term yields, however, they questioned the impact that these lower yields would have. Despite their differences, they all agreed that there was little to be gained at the last meeting to change the current asset program. Expect the BoE to sanction more asset buying in November when they meet the current bond buying quota.
U.K. jobs data has taken the market by surprise this morning. Dealers had been expecting no change in the headline print, however, that was not to be. Unemployment in the U.K., for the three months to August, fell to a 15-month low, while the number of people actively in work rose to new record highs. The unemployment rate fell through that psychological +8% barrier to +7.8%. The combination of job creation in a U.K. recession continues to confound many. Breaking it down, the increase in part-time positions to a new record high (+8.1m persons) has helped lift total employment (+29.59m persons). On the welfare side, the number claiming UI fell-4k last month to +1.57m or +4.8%, unchanged from the previous month. This data is presently keeping the sterling bulls happy.
Despite all the current market noise, the EUR is still contained to a tight trading range. Can the U.S. economic releases this morning break this trend? On their own, U.S. housing data is expected to have little effect on price action. Some analysts are looking for U.S. housing starts to improve from +750K to +760K in September, slightly below consensus. Despite this being more good news for the housing sector, investors will most likely have to rely on some other stimulant to break this tedious EUR grind. So far the single unit has been confined to a 30-tick range despite positive developments.
Weekly EUR longs remain onside and stops have been raised to lock in profits. These stops are appearing just below the 10-DMA at 1.2980. The day trend indicators continue to head higher and 1.3150-70 target remains viable. Currently, system buying has the EUR trading on top of its session highs trying to squeeze the weakest of day traders who are ‘punt’ short. Expect the interbank to seek stops to fuel this move even further. Stronger resistance at 1.3070-75 is standing in the way of the recent 1.3177 highs.