European Bond Auctions Drive Sentiment Mid-Week; DAX Targets 6080 Support Levels

Stock markets are consolidating near the lows from last week as investors are still unable to find substantive reasons to push prices higher. The main story as we approach the middle of the week is the latest bond auction in Spain, as bond yields are seen rising throughout Europe. Equity futures in US markets are making modest gains but the overall picture is mixed with Asian markets trading lower. European stocks are splitting the difference, trading mostly unchanged with the STOXX 600 benchmark trading just above 242.80 during the London session.

More broadly, however, the STOXX 600 is now showing losses of 11% from its highs seen in the middle of March this year, and this equates to a total performance of -0.7% for the first half of 2012. This is coming largely from worries that Greece will be forced to leave the European Monetary Union and uncertainties relative to the global growth performance for the remainder of the year.

Funding costs for 3-month treasury bonds in Spain rose after 3.08 billion Euros in government debt was sold at auction. Spanish yields are now seen above 2.36%, which is a substantial rise from the auction results that were seen at the end of May. This rise in funding costs is a clear negative for investors who continue to look for evidence of stability before committing to long positions in European equities.

For the rest of this week, expect volatility to be created by Consumer Confidence figures out of the US, which are expected to come in at 64.3 (a light drop from the 64.9 seen the previous month). This will be followed by Trade Balance data out of New Zealand and BBA Mortgage Approvals out of the UK. Into the close of the week, the data docket gets heavier, with Germany preliminary CPI data, Retail Sales out of Japan and then Durable Goods and Pending Home Sales out of the US.

Technical Analysis:

The EUR/JPY is beginning to roll over once again (in line with its long term downtrend) as prices have most recently failed at 101.70, which was a previous high and the 38.2% Fibonacci retracement of the decline from 111.40. This upper level is still the key resistance area to watch, and we will need a break of the double top that is seen here before the bias can turn to bullish in the longer term. Focus now remains on the downside, as prices are looking to target the spike low that is now seen at 95.60. A break here will signal that a top is in place for the remainder of this year.

The DAX is making some interesting technical formations as prices are caught in a symmetrical triangle in the longer term. Prices are giving some indication of which way this triangle will break, given the latest failure at Fibonacci resistance in the 6120 area. 6120 is the key bullish trigger but until that area is breached, we will continue to look at sells on rallies, with the next downside target coming in at 6080, followed by 5920.

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