The Euro continues to sell off as market focus centers on European bond yields, which are not only reaching record highs in Italy but also rallying in many of the peripheral EU nations as well. Market speculation of credit downgrades in Austria added to the volatility but things managed to calm down after Moody’s dismissed these rumors. Other hard-hit areas were France and Denmark, which is essentially indicative of a widespread flight from European bonds, even in the core countries.
Macro data showed that both the German and Eurozone ZEW surveys are identifying renewed economic weakness but some positives were seen in the UK, as BoE comments suggested that inflation will encounter a drastic downward correction through 2012 and reach the central bank’s target level of 2% by the end of next year. Regional focus today will come with the BoE Quarterly Inflation Report, and if these comments are supported by the data, the GBP likely to extend losses against most of the majors.
US macro data was relatively encouraging (but not enough to push equity markets into positive territory) as retail sales passed expectations at 0.5% and the New York Empire State manufacturing report showing a strong improvement from last month’s numbers (which were well below historical averages). Inflation at the producer level was also lower than expectations but the core reading remains slightly above the Federal Reserve’s target levels, at 2.8%.
Fed speakers were seen adding to this barrage of economic data, as differing comments from members Fisher and Evans argued the appropriate level of monetary stimulus for the US economy. Evans actually suggested that additional stimulus is necessary, so it is relatively surprising that equity markets could not manage to push into positive territory given the mostly encouraging economic data that was released yesterday. From this, we can see what is really driving market activity as traders continue to be fixated by headlines and market speculation. This type of environment is rarely positive for equity markets so expect stock rallies to be sold into for most of this week.
Looking forward, macro releases will be mostly inflation-related, as US and Eurozone CPI will be released along with the UK quarterly inflation report and claimant count. Additional US data will come in the form of Treasury Inflows (which could get more attention than it normally does) and the monthly Industrial Production figures. The Fed’s Dahlgren, Rosengren, and Lacker are also scheduled to speak.
The EUR/USD has broken its major daily Fib retracements, which turns the longer term view bearish and we are now looking at the shorter term time frames to get an idea of potential sell zones for the rest of this week. The first area comes in at the 38.2% hourly Fib retracement at 1.3570, as this area matches nicely with historical resistance. Prices are likely to be contained in this area given the negative momentum indicators and the rapidly descending EMAs, which will also help to limit the upside.
The S&P 500 is making an attempt to bounce off of its 100 day EMA but the upside potential here is limited, given the consistently lower highs that we are seeing on the 4H charts. Momentum indicators are bearish and ready to cross back into negative territory so the latest 4H trendline is likely to contain prices for the rest of the week. A break of support at 1240 will accelerate losses and bring 1218 back into focus.