Political events in Italy are getting some of the market’s attention as protestors in Italy show dissatisfaction with Mario Monti’s plans for economic recovery. While most are not expecting this to have any immediate effect on the specific details of the program, the possibility remains that in the longer term view, these events could have an impact on the political leadership when election seasons start to roll around and lend to a more populist bias when new programs are initiated. Monti’s economic reform plan was approved by his cabinet at the end of last week but the Italian parliament has 60 to make a similar approval.
These strikes in Italy are set to continue today, so this could weigh on risk bias for European assets. Similar results were seen when we saw rioting and protesting in Greece, and with no major macro data on schedule, equity markets could easily be influenced more by general sentiment rather than economic figures. This story is likely to be revisited again until the vote is passed, so we should see some additional volatility in relation to the parliamentary passage of the Monti reforms.
In currencies, the Euro did manage to push back above the psychological 1.30 level this week, which is reflective of the markets belief that the Greek PSI is settled and will be implemented but, given this rally, prices remain vulnerable to the downside if we get any significantly negative news out of the Eurozone. Price volatility so far this week has been minimal, partly because of the closure in Asian markets for the Lunar New Year holiday but another story to watch has been the recent activity in the Swiss Franc.
The Swiss National Bank’s price floor (1.20) is close to being tested with the EUR/CHF seeing lows below 1.2060 on broad CHF strength. Markets are apparently looking to test the resolve of the SNB, so central bank intervention in this currency pair could be imminent. If this occurs, it will be extremely CHF negative and could provide most of the volatility we see this week.
Looking ahead, the next macro data we will be looking at is the PMI data out of the Eurozone and Germany and this will be followed by policy meetings with the European Finance Ministry. Weak manufacturing data will lead analysts to comment on the fact that the European Central Bank will need to do more to stimulate growth (rather than just provide liquidity to private banks), and this could actually lead to forecasts for lower interest rates in the Eurozone. The region is currently operating in a deflationary environment, so any moves like this would be controversial and probably result in internal disagreements within the central bank.
The EUR/USD has seen a nice rally on the shorter term charts, but given that the longer term momentum is clearly downward the latest rallies will undoubtedly be viewed by many as a new opportunity to initiate short positions. Currently, major resistance is seen at 1.3080, which is an acceptable sell entry. Support below is seen at 1.2840, and a downside break here will accelerate losses and target areas roughly 100 points lower.
The S&P 500 is breaking out of its short term trading range, with prices now falling through support at 1305. There is some scope for recovery here, as the psychological level at 1300 does have the potential to hold, but any hourly close below here turns the short term picture back to bearish. This move is being viewed as corrective, as we have seen a very consistent rally, with very little in the way of a pullback, so we will look to enter back into long positions at cheaper prices.