Risk sentiment was seen heading lower overnight as news headlines and macro economic data releases continue to support the general bear market direction that has become more apparent in the last two weeks. Fitch downgraded long term credit in Greece from B- to CCC and this, along with negative data from the US was enough to provide confirmation of the latest downside extension. Concerns over the debt situation in the Eurozone continue to be the main theme, with most of the evidence of the overall negative bias in the market coming from the significant selling pressure that is seen in the Euro. Equity markets were also lower, however, with the S&P 500 threatening to fall below the 1300 level. Another negative piece of news did come from the leader of the SYRIZA party in Greece who made some apparently defiant comments, saying that if monetary aid to Greece is discontinued, the country will have no choice but to default on its debt obligations.
At the moment, markets are being driven by stop loss activity and momentum selling with some of the biggest moves coming in the USD/JPY and in the Nikkei. The latest wave of strength in the Japanese Yen is pushing down the USD/JPY pair and this is seen as a strong negative for Japanese export companies. The result was a 2.5 percent drop in the Nikkei 225 and the deterioration in sentiment was propelled in part by the Philadelphia Fed Manufacturing report, which showed a negative reading at -5.8 for the month of May. Given that the April figure was positive at 8.5, the latest figures are helping to confirm that the manufacturing sector is not aiding the economic recovery in the US. The number should be viewed with some skepticism, however, as other regional data in the US is not showing similar weaknesses. The same report from the New York Fed actually showed a monthly increase of 11 points. Because of this, the Chicago PMI survey that will be released on the 31st of March will take on a higher level of importance than is typically seen.
Other reports released during the US session showed that the Leading Indicators report showed the first drop in 2 quarters and the weekly jobless claims were mostly unchanged at 370,000. April saw a significant increase in jobless claims, so while this week’s data shows no major improvement, at least there is some evidence of stabilization, which is likely to be enough to keep markets from discussing additional rounds of quantitative easing stimulus from the Federal Reserve.
Most of the underlying concern is still coming from Greece, however, as the credit downgrade from Fitch was accompanied by a statement which said that a Greek exit from the European Monetary Union would be “probable” if the next elections (held on June 17th) do not produce a majority government intent on implementing the austerity measures that had been agreed upon previously and which will be required before additional bailout funding is disbursed.
The GBP/USD is seeing an intense wave of selling pressure, removing short term historical supports en route to a test of 1.5630. A break here will be very bearish but expect a bounce first off of this level, as prices work off oversold conditions on the shorter term time frames.
As expected, Gold has bounce off of support at 1525 after making a full Fibonacci retracement of the previous daily rally. As long as 1525 holds, we expect a resumption of the longer term uptrend with initial resistance now seen at 1675.