Germany set to agree to bailout fund compromise

By Michael Hewson (Senior Market Analyst at CMC Markets UK)

Concerns about the economic situation in Europe remain at the forefront of investor’s minds this week after the biggest negative week of 2012 for equity markets last week, on the back of some very negative economic data from France and Germany.

Reports at the weekend that Germany looks set to relent on its opposition to the running of the remainder of the EFSF alongside the new €500bn European Stability Mechanism when it comes on line in the middle of this year. This should create currently unallocated funds of €740bn in total.

The decision is expected to be confirmed later this week in Copenhagen at the latest eurogroup finance ministers meeting which is due to be held on Friday and Saturday.

This is likely to be as far as Germany will go for now as any additional funds that could be made available would have to be referred back to the German parliament for constitutional approval. This measure would not require that, as it would come from existing funds and guarantees.

This, it is hoped will prove to the IMF that Europe is doing its bit to help alleviate the crisis, given the IMF’s recent reluctance to commit to increasing its own funds and potentially commit a larger amount of resources towards further bailouts after its reduced contribution to the recent Greek bailout.

Staying with matters European, Ireland is expected to announce its fiscal pact referendum date this week with new polls showing support rising for the treaty, while Spanish bond yields remain elevated over concern about its own finances and the ability of its government meet the fiscal targets set for it after the new government suffered a political setback in Andalucia at the weekend, losing to the socialists. With a general strike on Thursday and the 2012 budget due to be announced Friday the problems are mounting up for the new government.

Today’s German IFO data for March will be a key test of business sentiment after last week’s disappointing PMI data, with all measures expected to remain stable after last months sudden jumps.

The business climate is expected to improve slightly from 109.6 to 109.7, while current assessment is expected to slip slightly from 117.5 to 117.

In the wake of Friday’s disappointing new home sales data in the US which saw February prices slide 1.6%, against an expectation of a 1.3% rise, today’s release of pending home sales for the same month are, it is hoped, not expected to follow a similar pattern.

Expectations are for a rise of 1%, down from 2% in January.

EURUSD – the 1.3300 level continues to cap the upside and while pullbacks continue to get shallower there is a risk of a break higher towards this year’s highs at 1.3490. While below 1.3300 the risk remains for a lower euro back towards last week’s lows at 1.3135, a break of which should open up a move towards the 1.3070 level. On the downside the key support remains the February lows at 1.2975 on the way to 1.2800.

GBPUSD – the cable continues to struggle anywhere near the 1.5930 level, after breaking back above the 1.5820 pivot on Friday which should once again act as support. To follow through on the downside it needs to hold below the 1.5820 level to target a move back towards the larger support level at 1.5610 and this month’s low. It is also 50% retracement of the entire up move from the 1.5240 lows to the 1.5990 highs, remains a key support.

Above the 1.5930 area has the potential to target a move to the 1.6000 level and even the October and November highs at 1.6170.

A break below 1.5610 argues for further weakness towards 1.5530, the 61.8% level of the same move as well as 1.5420.

EURGBP – once again the lack of impetus towards the upside keeps a lid on the single currency with last weeks move to 0.8370 lacking the impetus to retest the 0.8400 level and as such the single currency remains range bound with support around the 0.8320 area.

While below the 0.8400 level the focus remains for a move towards a retest of the January lows at 0.8220, on a break below the 0.8280 level.

USDJPY – last week’s failure at the double top at 84.10/20 has seen the dollar slide back towards the below the 82.85 level and head towards the 81.85 initially, which could well lead to further losses towards the 80.60 level. Last week’s candle was a bearish engulfing weekly candle which suggests in the short term a period of consolidation towards the cloud support at 80.60.

In the medium term we could well have seen a short term top but the bias remains for a longer term move higher, while US 10 year yields remain firm.

Equity market calls

FTSE100 is expected to open 17 points higher at 5,872

DAX is expected to open 32 points higher at 7,028

CAC40 is expected to open 18 points higher at 3,494

FTSEMib is expected to 51 points higher at 16,536

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