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The market has been in risk off mode for the majority of the London Session as the news flow out of Europe suggested that Greece still has more hurdles to jump through before it will get its next tranche of bailout funds. A German official spokesman declined to name a possible date that Greece would receive the funds, however it seems unlikely to be at Monday’s Eurogroup meeting. This led to some concern that Athens will not be able to make its EU4 billion bond redemption payment due on 16th November. However, an EU spokesperson confirmed that there would be no Greek default next week and that the authorities were aware of Greek financing needs.

How do you solve a problem like Greece?

The market is understandably nervous about Greece and 1, its prospect of getting the bailout funds and 2, its chances of staying in the currency bloc. The market had a strange ability to ignore good news today. The same EU spokesperson also said that a Greek debt buy-back scheme is being studied. This is a positive development since it would reduce Greece’s enormous debt burden.  However, the spokesperson also said that a buyback scheme is extremely complicated, especially with the IMF and the ECB both refusing to accept losses on their Greek debt holdings. Thus, it appears that, yet again, Greece is centre stage and its problems are nowhere near solved. Greek concerns caused EURUSD to nose dive and Spanish bond yields to rise to their highest level in a month. The spread between Spanish and German yields rose above 450 basis points. EURUSD is at its lowest level for two months. Last week’s bearish development that saw EURUSD fall through the daily Ichimoku cloud and pass through its 200-day sma support zone have heaped downward momentum on this cross.

The ECB fails to boost risky assets

Adding to this downward pressure is the ECB’s wait and see stance and failure to enact any fresh measures to reduce credit risk in the region at its meeting yesterday. The ball is in Spain’s court – if it wants the ECB to stabilise its bond market then it needs to accept conditionality. However, we don’t think that Spanish PM Rajoy will   ask for financial assistance and expose himself and Spain to even more austerity. Instead we believe that Rajoy will be forced into an aid request sometime next year. But there could be some brief respite for Madrid, as Spain is fully funded for 2012, thus any stress in its bond markets may not be felt until early next year.

Europe and the US cloud signs of improvement in China

Eurozone fears have trumped better than expected Chinese data and caused risky assets to end the week on a sour note. Even the AUD shrugged off better retail sales, industrial data and lower inflation from China to fall along with other risky FX crosses. It tumbled below 1.04 earlier during the London session.

Waiting to hear Obama on the fiscal cliff

Greek fears in Europe and the fiscal cliff in the US make Tuesday’s Presidential election seem like a distant memory. Obama won by a landslide in the end, and Romney never felt like a true challenger to the crown. A second term for Obama is good news for continuation and certainty, but a Republican Congress and Democratic Senate makes a resolution to the fiscal crisis, which is fast-approaching, less clear cut. The markets are waiting for President Obama to hold a press conference this evening at 1800 GMT. The fiscal cliff is set to be the topic up for discussion. If Obama says something positive – like he will work with Republicans and everyone can get a bit of what they want – then the markets may recover slightly into the weekend. However, while a tax and spend deal remains elusive in the US and Greece still has no bailout funds, it is hard to see how risky assets can muster a rally.

Watch out for weekly closes

As we approach the weekly close in Europe some crosses are approaching important levels. In EURUSD 1.2650 is now the base of the daily Ichimoku cloud, below here is the start of a technical downtrend. While in USDJPY 78.80 is a cluster of daily smas, and a key support zone. In AUDUSD 1.0350 is the base of the daily cloud, a break below here is a very bearish development for this pair that could see us return to parity in the near term. Gold is still benefitting from Obama’s re-election and his support of QE3. $1,740 – the 50-day sma – is the next major resistance level to get over. Gold priced in euro has already broken above the top of its daily cloud, suggesting that it is back in a technical uptrend. The next resistance level to watch is EU1,375 then EU1,390.

We shall have to see if better than expected US consumer confidence data for November rising to 84.9 from 82.6 in October, the highest level since 2007, will boost risky assets later this afternoon. However, consumer confidence seems to be moving at odds with the fundamental backdrop and may not be enough to prop up risk assets by itself.

EURUSD: Daily Ichimoku cloud chart


Gold/EUR: daily chart



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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