Equities and high yielding currencies saw a broad based rally yesterday after the Greek decision to remove the referendum vote from its schedule, giving markets some sense of positive direction (based on a presumption of EU solidarity) and removed an element of uncertainty into the close of the week. The increase in sentiment was aided by the outcome of the ECB monetary policy meeting, which saw a decrease in interest rates by 25 basis points (to 1.25%).
At the following press conference the new ECB President (Draghi) made comments saying that the Euzozone is headed for a “mild recession” making it necessary to lower the central bank’s base rate as a way of preserving growth trends into 2012.. The rate cut led to a moderate sell-off in the US Dollar, which actually created a rally in the Euro despite the decrease in yield values.
The Cannes G20 meeting also produced some interesting comments, as one of the points of discussion was a potential exit strategy for Greece if they do, in fact decide to leave the EU. There have been no significant comments suggesting that this is a real possibility, however, as it would place renewed burdens not only on Greece but on the global economy as well.
At the moment, it appears that such a drastic move is viewed as unnecessary but any official mentions of the possibility will not elicit a calm reaction from market participants. The next major question going forward will be whether or not we will see a confidence vote in the Greek Parliament. A removal of the Greek prime minister would also be jarring for markets because there is little to suggest that any other party members have a more suitable plan for solving the current debt problems.
Into Friday, however, markets will be forced to turn their attention back to macro data, as the US Non Farm Payrolls is expected to create the next injection of price volatility. Consensus estimates are calling for an increase of 95,000 jobs for the month October, and an unemployment rate of 9.0%.
On the whole, these results would be less than impressive but would suggest that significant downside data surprises are unlikely in the near term and would mostly like bring moderate rallies in both stock markets and in risk currencies. These results would also lead many analysts to continue to expect that a third round of quantitative easing will not be implemented as the economy appears to be stabilizing on its own.
The USD/JPY has come under pressure once again on the hourlies after the massive rally to the 79.50 region. Prices are currently testing pullback support, which is seen at 77.80, which is also where the 100 day EMA comes into play. A break here turns the near term bias back to bearish.
The S&P 500 is attempting to bounce off of the 1215 area, which is now a double bottom on the shorter term charts. Indicators are suggesting of further strength into the 1290 area before turning lower. A break of 1215 targets 1185. Selling rallies is the preferred strategy.