The Senate in Italy voted to pass its proposed austerity measures and the improved risk sentiment is helping equity markets move higher. Another positive is seen in the European bond sales, as Italian treasuries finally start to show some declines after last week’s rally above 7%. The improvements in funding costs are seen as a positive for the country’s ability to remain financially solvent and this is bringing some buying activity back into the Euro versus the Dollar.
It will be interesting to see how long this optimism can continue with the event risks that are still ahead of us. There are potential problems that could come with the leadership transition (as Prime Minister Berlusconi steps down) that has yet to reach completion. But even though this is the case, the budget passage is still a positive and we could see some carry-through as the new trading week begins. Enhanced volatility is likely to be the main theme as financial markets assess the credibility of new EFSF strategies and any potential obstacles that are seen limiting majority votes in the budget plans in Europe’s peripheral economies.
In light of the recent developments in Europe, one of the most under reported stories has been the results seen this season in corporate earnings. Greek debt write-downs have had major effects here as well, and one of these stories surfaced on Friday, as third quarter revenues from Allianz came in at 196 million Euros (much lower than market estimates of 660 million Euros). Losses in Greek debt investments were seen as the main driver for these results and if we continue to see stories like this, markets are going to have to take notice (and bring sellers back into Equity markets and high yielding currencies).
On the whole, however, earnings have held up reasonably well (US corporate earnings are up more than 15% from third quarter last year) despite the uncertain market environment and the increased volatility we have seen in all asset classes. This level of resiliency is encouraging so if this can manage to continue we should start to see some stability come back into the trading environment, on the argument that the sovereign debt crisis is only having a limited impact on actual business activity.
The GBP/USD is starting to form a descending triangle and prices have not made three consecutive lower highs on the 4H charts. We are seeing some consolidation around the 100 and 200 period moving averages here but a clean break of support at 1.5880 should accelerate losses and bring some clearer direction in the pair. A break of resistance at 1.6090 invalidates the pattern and brings a neutral bias.
The S&P 500 has come into familiar resistance territory as prices are now testing the 1270 level. Momentum indicators point to the potential for further gains but we need to see a clear break of the clustered resistance between 1275 and 1290 before we can lend and credence to this bias. A break of support at 1215 would be very bearish and signal that a medium term top is in place at the old highs from the end of October.