Late last week we speculated weather the markets had discounted a victory by the socialist party in France. Judging by the market action this week, that was not the case.
In Europe, Hollande is presenting himself as the big spending anti-austerity candidate, ready to do battle with Chancellor Merkel. Ambrose Evans-Pritchard observes, the markets are already observing the difference between Germany and France.
“What is true is that the CAC-40 index of French stocks has underperformed Germany’s DAX by 20pc since last August, an ominous divergence for two countries yoked so tightly together. The yield spread of German 10-year Bunds over French OAT bonds has jumped 90 basis points.
This parting of the ways pre-dates the “Hollande scare”. It goes beyond downgrade jitters, or fears of contagion from $710bn of French bank exposure to Italy, Spain, Greece, Ireland, and Portugal (IMF data). It reflects a gut feeling in global markets that France is sliding into deep trouble, clinging to a ruinously expensive social model in a Teutonic monetary union and a Chinese trading world.
French economists say the moment of danger will come later this summer – whoever is elected – as the full force of Europe’s contraction crisis hits France.”
Well the “Hollande scare” has become a reality, but there are other threats to the eurozone. In Greece with ten different parties running, there is no majority. Currently the left wing Syriza is trying to form a new government. This party is opposed to the recent bailout as well as the austerity pledges of the previous government.
It is interesting to note that on May 15th Greece has €430M of bonds come due for holders of bonds that rejected the recent debt swap. Without an effective government, will the Greek’s be able to float another loan to pay off the maturing debt? If not, are the Greek days in the euro numbered? And how much money have French banks loads to Greece?
As the market focused on the French political situation, the Euro seemed determined to mount a rally; however, the negative Greek situation has moved to center stage. The spreading bearish psychology has taken most asset groups lower. It is surprising the Euro refuses to stay under the 1.30 handle versus the USD. The market acts like there may be central bank support around this level.
During recent bear moves in the EURUSD, as we observed last month, support emerged in the 1.30 area, and the bulls carried the day. Not so yesterday as the market, unnerved by the week end election results, left a gap as it sold off to 1.2955. Then the selling abated, and the market rallied back to the 1.3065 area where it stalled. So far in the early trade today, the gap between the high yesterday and the Friday low of 1.3081 remains unfilled.
Gaps, as the technical traders contend, are quite important, and the gap is always filled, they contend. Gaps in Forex markets are rare since these markets trade around the clock from Sunday evening until Friday afternoon. But the longer it takes to fill this gap, the greater are the chances there is another leg down in the euro.
In yesterday’s lower market, the open interest in euro futures at the CME went up 8,295 contracts to the total open interest of 312K. Also in the very active British pound trade, the OI increased over 8K contracts. Often markets continue in the direction of the trade on a day when the OI goes up.
We continue to be surprised by the support near the 1.30 handle considering the bearish backdrop from Europe. If equities, or metals continue their downward path, perhaps some of the euro buy orders will be cancelled, and we will check out the 1.2850 area.
Written by cashbackforex.com