The recovery in market sentiments was rather short-lived as risk selloffs resumed towards the end of the last week. Disappointment from the Franco-German summit turned market around and there was renewed worry on interbank liquidity stress. Global economic data continued to disappoint and point to further slowdown while investment banks such as Citigroup and JP Morgan downgraded their forecasts on US growth while Morgan Stanley trimmed its global growth outlook, warning the US and Europe are 'dangerously close to recession'. Major equity indices stumbled on Thursday and Friday while gold made another record high at 1881.4 and is marching towards 1900. The currency markets, though, were relatively calm. Commodity currencies were generally low but loss was so far limited. Swiss Franc is relatively indifferent to risk aversion on concern of intervention from SNB. Yen was higher but momentum as unconvincing. Surprisingly, Sterling was the strongest currency last week on safe haven flows. At this point, it looks like there will be another around of risk selloffs to push equities to new yearly low ahead of the highly anticipated Jackson Hole symposium.

The Franco-German meeting failed to come up with solutions to settle the debt crisis. Leaders of biggest economies in the 17-nation region proposed to create a 'true European economic government' which will eventually lead to a common tax and fiscal policies within the Eurozone. Concerning fiscal issues, Germany and France will create a common corporate tax base and tax rate between the 2 countries from the start of 2013. Moreover, they will propose in September the imposition of a new financial transaction tax across all Eurozone members. While the details of the types of taxes were not provided, investors were obviously irritated by the financial transactions tax as the euro and equities plunged after the announcement. More in France And Germany Rejected Joint Eurobonds, Focused On Economic Integration.

The ECB said that it has recently lent US$ 500M in its 7-day liquidity-providing operation to a bank at above market rates. This was the first time since February that the facility was used. Fears that more banks will seek ECB's funding because of their heavy exposure to debts of Greece and other debt-ridden countries increased and would make the market outlook negative. Concerns over contagion of Eurozone's sovereign crisis have spread to the US. The WSJ said that US regulators are taking a closer look at the US units of Europe's biggest amid concerns that the region's debt problems will spread to the US banking system. The report said that the New York Fed is 'very concerned' about the issue and has been seeking information about the banks' ability to access funds to maintain their US operations. New York Fed President Dudley denied the officials are watching a particular group of banks closely and reiterated that the central bank treats US and European banks 'exactly the same' and is 'always scrutinizing banks'.

Sterling was somewhat supported by safe haven flows into UK government debts even though the economy remains weak and chance of more easing from BoE is high. Yield also sank after minutes revealed that MPC members Dale and Weale abandoned the call to hike rates in last meeting. More in BOE Voted Unanimously To Keep Rates Unchanged, First Time Since May 2010. UK 10 year gilt yield dived to record low of 2.273% on Thursday before closing the week at 2.39%. Safe haven flows pushed EUR/GBP to as low as 0.8653 last week but the rebound on Friday suggests that investors are not ready to get themselves more committed to the pound yet and the cross will remain mixed in near term.

Selloff in stocks was steep on Thursday and Friday, where we have DOW down from intraday week high of 11529 to close at 10817. DOW, S&P 500, NASDAQ, FTSE 100 and CAC 40 managed to hold above recent low. However, note that DAX has indeed dived through prior week's low of 5487 and closed at 5480. The German index could be leading the way down as other major global indices extend the fall to test recent lows this week. Sentiments somewhat stabilized briefly on news that Olli Rehn, the European Union commissioner for economic and monetary affair said that EU may present a report to European Parliament and the Council on the setup of a system of common issuance of European sovereign bonds under joint and several liability. However, the idea of Eurobond will face strong opposition just as European Union President Herman Van Rompuy expressed that there will be Eurobonds only when there is genuine budgetary convergence, the day when everyone is in balance or virtually in balance.

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Technical Highlights

DOW's recovery from 10604 might have completed at 11529 last week, ahead of mentioned 11862 resistance as expected. It's a bit early to confirm fall resumption for the moment, but the index is nonetheless vulnerable to deeper fall ahead. We'll stay cautiously bearish as long as 11529 resistance holds and expect an eventual downside breakout soon towards 61.8% projection of 12753 to 10604 from 11529 at 10201 in near term. As noted before, the index has completed a head and shoulder top reversal pattern earlier and the current fall should eventually target key cluster level of 9614 (50% retracement of 6470 to 12876 at 9673) and below.

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While gold made another record high against dollar at 1881.4 last week, it's also exceptionally strong against other major currencies. XAU/EUR jumped to new record high at 1312.92 last week before retreating back below 1300 psychological level to close at 1286.23. Near term outlook will remain bullish in any case as long as 1201.96 support holds and we'd expect further rise towards 261.8% projection of 954.11 to 1088.1 from 1021.21 at 1371.97 next.

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The dollar index continued to stay in familiar range as recent consolidation continued, just like the EUR/USD. At this point, a downside break out is mildly in favor as long as 75.383 resistance holds. Break of 71.48 will target 72.69 first. Further break there will confirm resumption of the whole down trend from 2008 high of 88.70 and should target historical low of 70.70. On the upside, above 75.38 will turn focus back to 76.71. resistance but break there is still needed to signal trend reversal. Or, we'll stay neutral at best in the index.

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The Week Ahead

A number of important economic indicators will be released this week, including Eurozone PMIs, German ZEW and Ifo, US and UK GDP revision. Nevertheless, main focus will definitely be on the Jackson Hole symposium. After the Fed announced to keep interest rates at exceptionally low levels at least through mid-2013 on August 9, the market has been increasingly speculating that Chairman Ben Bernanke will signal additional easing measures at the meeting next week. According to a CNBC survey done after the FOMC meeting, 46% of respondents said the Fed will resume QE, up from 19% in the July survey while 37% said the Fed will not do QE, down from 68% in July. Also, of those who believe the Fed will resume QE, the asset purchases are expected to average at 628B, up from 377B in July. More in Evaluation Of QE2 And Preview Of Possible QE3 Ahead Of Jackson Hole Symposium.

  • Tuesday: Eurozone Flash PMIs, German ZEW; Canada retail sales; US new home sales; New Zealand trade balance
  • Wednesday: German Ifo; US durable goods; New Zealand retail sales
  • Thursday: German Gfk consumer sentiment; Swiss ZEW; US jobless claims
  • Friday: Japan CPI; UK GDP revision; Swiss KOF; US GDP revision

EUR/GBP Weekly Outlook

Despite dipping to as low as 0.8653 last week, EUR/GBP held above 0.8642 support and recovered strongly before closing. The development suggests that recent sideway trading is not finished yet and we'll continue to stay neutral. on the upside, above 0.8886 will re-affirm the case that fall from 0.9083 has completed at 0.8642 and should bring stronger rise to retest 0.9083. On the downside, however, break of 0.8610/42 support zone will has medium term bearish implication and should bring deeper fall to 0.8284/8355 support zone first.

In the bigger picture, price actions from 0.9799 (2008) should be unfolding as a consolidation pattern in the long term up trend. The first leg is completed with three waves down to 0.8067. At this point, EUR/GBP is still holding above 0.8610 support with daily MACD staying above signal line. Thus, there is no confirmation of completion of the second leg from 0.8067. Though, even in case of another rise, we'd expect strong resistance ahead of 0.9410 medium term resistance to bring reversal and starts the third leg. On the downside, break of 0.8610/42 support will now be an important bearish signal for 0.8067 and below.

In the long term picture, long term up trend from 2000 low of 0.5680 shouldn't be over yet and the choppy fall from 2008 high of 0.9799 should be a correction only. We'd expect such correction to be contained by 0.7963/0.8186 support zone and bring up trend resumption. Rise from 0.5680 is still expected to extend beyond 0.9799 high eventually.

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