11/07/2014: trading outlook ahead of the US session

From the reaction this morning, investors appear to be fairly sanguine about the issues at Banco Espirito Santo (BES) in Portugal. Forex markets have settled down with major pairs basically flat, equity markets have posted modest gains, whilst even the peripheral Eurozone bond yields that had spiked higher yesterday are beginning to retrace their moves.

Overnight, there have been attempts to talk down the issue over BES, noting that the bank has a significant capital buffer to prevent contagion spreading. There have also been a raft of banks (such as Bank of America Merrill Lynch and Goldman Sachs) have suggested that there was protection in place to cope, such as the €6.4bn in the Bank Solvency Support Facility that can cover losses.

Although this suggests that it could just be a storm in a tea cup, there are still several market indicators that can be watched to gauge how the market views the situation. Further upside in gold and downside in Dollar/Yen in addition to the most obvious factor of Portuguese bond yields pushing higher should be watched. A chart of the Portuguese 10 Year government bond yield shows the reaction below.

P10YT   11072014

There is very little else for traders to focus on today other than Portugal, however the Canadian unemployment at 13:30BST could provide some distraction. The rate is expected to remain flat on the previous month at 7.0%.

However, forex markets are largely flat this morning, as it appears as though there is now a certain degree of wait and see. The Dollar Index is basically flat today. has EUR/USD is trading around $1.3600, but I still view any gains into the resistance band $1.3620/$1.3650 as a chance to sell. Cable is nicely supported above $1.7100 which seems to be forming as the new low of a trading band. Dips on GBP/USD towards $1.7100 would be a chance to buy, with long positions still advisable down to the $1.7060 support.

USD/JPY is another story. The closing support at 101.30 is still intact, but there has been further tests of this level today. I am increasingly worried about this support which I see as reflecting the perception of risk appetite. For now the support holds, but for how long? It looks as though USD/JPY is under increasing pressure and rallies are beginning to fall over at lower levels.

The price of gold broke out above $1332 yesterday and has held the break today. There has been little movement in this morning’s trading suggesting an element of caution. However traders appear to be happy with the upside break so far. The breakout implies $1358 and a pullback towards $1332 would be ideal as an entry. Long positions would be still preferred above $1325.

European equity markets have been less convincing in their “recovery” that other markets today. FTSE 100 broke sharply lower yesterday, following on from yesterday’s broken primary uptrend. The resistance comes in at 6700 initially and there has already been an early rejection of this level. The bullish long term outlook has been significantly harmed by yesterday’s sell-off and there will need to be a quick recovery to prevent any permanent damage. The DAX on the other hand came back to find support exactly at its primary uptrend yesterday. This support is important as 9600 is a historic pivot level. The bulls will be hoping this holds to prevent a sell off back towards 9400. S&P 500 futures are suggesting a rebound of 3 points at the open as Wall Street looks to support the European indices once again.

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