Risk assets took a dive last night after the Greek Prime Minister (Papandreou) requested a confidence vote in parliament this week and a referendum on the current bailout agreement (which will be held later this year). Markets reacted unfavorably on the added uncertainty that could be seen if political impasses derail the agreed upon austerity measures that have been put in place so far. The Euro saw a heavy sell-off and equity futures are seeing declines as well.
Additional volatility was seen after the Reserve Bank of Australia cut its base rate by 25 basis points (to 4.5%) on growth concerns and this did little to encourage market optimism. The rate cut was mostly in line with expectations but the main question at this point is whether or not we will see the same thing in December. Specific limitations to growth were described as coming from the slowdown in Chinese economic productivity, declines in commodity prices and general market uncertainty.
The RBA’s accompanying statement did suggest that inflation is expected to drop for the remainder of the year and that current rate levels are moderately “restrictive,” which will lead many to speculate that further rate cuts are in store. Market attention will now shift to the FOMC and ECB meetings that will be held later this week and traders will be looking for some guidance in assessing growth prospects during the rest of 2011.
In macro data, Eurozone CPI came in higher than the consensus estimates at 3.0%. At the moment, an ECB rate cut is only expected by a small minority and with headline inflation at these levels, a decrease in interest rates looks even less likely. Today will see the release of more European data, as German and Eurozone manufacturing PMI on schedule. Market attention is still focused mostly on headlines and comments finance ministers but with most of the event risks having reached their conclusions, macro data is likely to start to play an increasingly important role as investors assess the success or failure of the recent EU summit meeting agreements.
The AUD/USD is continuing its steep drop from the highs seen at 1.0750. Prices are currently dealing with the 100 and 200 period EMAs on the 4H charts en route to the 38% Fib retracement of the decline from 1.0750. Expect some short term support here but a break would be a very bearish sign and suggest a fall back to the psychological 1.00 level. Shorter term, however, the oversold indicator readings need an opportunity to reset themselves so selling in these areas is risky.
The S&P 500 is pressuring historical support at 1220, with very little bounce happening in this area. A break here targets areas much lower, in the 1185 region and turns the bias back to bearish, as it removes moving average support seen with the 100 and 200 day EMAs. Indicator readings are still bullish, with positive momentum, but the lack of bounce we are seeing at 1220 is not encouraging and a break is looking imminent.