Markets Encouraged as Berlusconi Agrees to Step Down as Prime Minister; Euro Hits Resistance at 1.3850

The Euro stabilized overnight after news that the Italian Prime Minister (Berlusconi) agreed to willingly step down from his post after the Italian parliament votes on the implementation of new austerity measures at the beginning of next week.  Market reaction was relatively surprising (given the element of uncertainty that this would induce) but apparently the market believes that new leadership needs to be in place if Italy hopes to avoid a situation similar to what is being seen in Greece.  The Euro was higher, on balance, against the US Dollar, which is generally a sign that risk sentiment is seen improving.

In the UK, FTSE 100 futures are pointed toward a positive open and trading will be dictated in part by the Trade Balance release that is scheduled for today.  Corporate earnings are mostly second-tier so equity markets will be headline driven once again, trading off of developments in Italy.

Asian markets had a positive close on news from China, which showed that inflation levels have begun to reverse (rising 5.5% versus 6.1% during the previous month) and this is encouraging for regional stock markets in that it decreases the possibility that the Chinese central bank will be forced to raise interest rates as a means for holding down consumer pricing pressures.  Japanese markets were also helped higher on a story from Isuzu Motors, which showed that the company is raising its 2011 profit forecasts.  The Nikkei 225 managed to gain 1.1 percent on the headlines but continues to trade below the 9000 level.

In the US, macro data is limited but equity markets could have a volatile day as we will see some major earnings releases.  Cisco, GM, Ralph Lauren, Macy’s, and EnerSys are on schedule today and given the wide variety of sectors represented on this list, it would not be surprising to see some drastic price swings during the New York session.  The big stock story yesterday came from Adobe Systems, which saw a drop of more than 9% in the aftermarket session on news the company plans extensive layoffs in both the US and Europe and downward revisions to profit forecasts for the fourth quarter.

Technicals:

The EUR/USD has turned almost exactly at the previously mentioned resistance seen at 1.3860 before showing a significant drop back to old range lows at the 1.3640 area.  This cluster of support is clearly the next target and a close below these levels would suggest a test of the daily 61.8% Fib retracement seen at 1.3565.  Momentum indicators are flattening out in neutral territory, which suggests consolidation in the medium term.

The S&P 500 is showing signs of failure ahead of key resistance at 1290 and without any meaningful bounce soon, it will look at though a medium term top is in place at the old highs from earlier in October.  The next obstacle to the downside will be the EMA confluence seen just ahead of support at 1210.  A break here will accelerate losses.

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