Italian Bond Rally Seen Weighing on Risk Sentiment; S&P Support Seen at the 200 Day EMA

The Euro was caught in what was mostly range trading overnight but the levels of supply and demand have moved down to regions below 1.38.  The main catalyst continues to be negative news headlines but most of the focus has now shifted to the situation in Italy.  Italian treasury bonds have rallied to new highs and this additional burden in borrowing costs will remain one of the key macro issues for the rest of 2011.

Markets continue to trade on shaky footing as today will see two key event risks, namely the Italian budget vote and the German Trade Balance release.  Yesterday’s trade figures out of Australia disappointed expectations, so if we see a similar report in Germany equities are likely to see some renewed selling pressure and bring the Euro down along with them.

There are no top-tier macro releases out of the UK today but we will see an earnings report from Vodaphone, and this should add some volatility to the telecomm sector.  In the US, the only scheduled release is the NFIB Small Business Optimism Index but this is unlikely to get much market attention.

Yesterday’s macro data came with the UK Retail Sales release, which came in weaker than the previous report (on an annual basis) at -0.6 percent for the month of October (+0.3 was seen in September).  Housing prices were also seen lower, with the RICS report coming in at -24.0 for the month.  The data did elicit a response in the GBP, which headed lower against most of the majors after the releases.

In Australia, the seasonally adjusted trade surplus showed a contraction for the month, coming in at 2.56 billion AUD (where 2.95 billion was seen previously).  In the US, consumer credit rose by $7.4 billion for the month of September (which was a drastic difference from the $9.7 billion drop that was seen previously).  The combination of these releases brought AUD/USD back through the 1.03 level as the pair continues the sharp declines that have been seen for all of November.

Overall, the main theme continues to be one of US Dollar strength and this was bolstered by Federal Reserve comments suggesting that their general bias will not require another round of quantitative easing stimulus. As long as this continues to be the case (and as long as markets remain weary of developments in the Italian bond market), this trend should remain in place with limited pullbacks seen in longer term scenarios.

Technicals:

The USD/CHF is starting to roll over after hitting Fib resistance at 0.9030.  The activity is coming after a fairly significant downtrend line on the daily charts, so a close above the previous highs will be a bullish signal.  Buying dips is the preferred strategy, support comes in at 0.8940.

The S&P 500 is seeing a nice bounce after hitting support at the 200 day EMA.  Momentum is still positive but the upside risk from this point is limited.  Major resistance comes in at 1290 and we expect any approach of this area to be met with heavy selling.

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