Congressional ‘Super Committee’ Fails to Reach Budget Agreement; S&P 500 Pressures Support at 1180

The Euro managed to gain back some of its Monday losses after European Finance Ministers approved the next loan disbursement to Greece (valued at (8 billion Euros), which will be paid out at the end of the month.  This helped equity markets and risk sentiment on the whole but this was tempered by comments from Fitch which suggested that the credit outlook rating in the US might be changed from “stable” to “negative”  despite the fact that the other ratings agencies are not expected to make similar moves.

On balance, markets appear to be looking at these issues favorably but there is also the possibility that the rise in equities and high yielding currencies should be viewed as profit taking on short positions rather than a genuine shift in the underlying bias.  Macro data will come mostly from the US today (as there are no major government or corporate releases scheduled in Europe, Asia or the UK).

US releases will be seen with GDP and Personal Consumption Data, which come with the Richmond Fed Manufacturing Survey and the latest FOMC monetary policy meeting minutes.  US corporate earnings are mostly from second tier companies but Hewlett-Packard was the main story yesterday, losing 2.3 percent in aftermarket trading on weaker expectations for fourth quarter earnings (driven by write-downs and slower PC sales).

This followed the wider trend in the S&P 500, which dropped nearly 2% after the US Congress’s “super committee” failed to agree on reductions in the budget deficit.  The group’s purpose was to agree on $1.2 trillion dollars worth of budget cuts (over a 10 year period) or risk automatic legislation that will cut spending in several key government programs and potentially limit growth prospects in the longer term.  The political gridlock is reminiscent of last summer’s debt ceiling debates but the effects are unlikely to create the same level of market turmoil as many analysts suggest that there are other routes for legal resolution.

Trading for the remainder of the week could be choppy as holiday-themed sessions will likely see reduced volumes and this has the potential to create volatility at unexpected times.  There will also be a lack of guidance in terms of macro economic indicators and scheduled speeches from European Finance Ministers, so trading activity could rely more on order flows than on true changes in the underlying market bias.  Longer term players are likely to use any rallies as new selling opportunities but shorter term price swings could take many traders out if stops are misplaced.

Technicals:

The GBP/USD is continuing with strong downside momentum with prices failing at 1.6170 resistance.  Longer term, this level is the key to the upside but it is unlikely we will see it anytime soon as prices are now pressuring Fib support at 1.56.  A break and daily close here will be significantly bearish but the neutral reading in the MACD suggests that we could see a period of consolidation before another spike lower.  First resistance is at 1.5690.

The S&P 500 is showing a great deal of weakness after falling though the support trendline of its last symmetrical triangle.  Prices are now dealing with historical support, which align with the daily 50% Fib retracement in the 1180 region.  A break here will target the 61.8% retracement and for now, selling rallies is the preferred strategy.  First resistance is seen at 1210.

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