Fears of a Euro existential crisis are gathering momentum amid simmering political turmoil in Italy. President Mattarella proposition to form a technocratic government has been met with fierce opposition, suggesting new elections late in the Italian summer now look likely. Italian equities and bonds have been sold sharply yesterday, dragging the Euro to its lowest level since November last year. Core bond yields also traded lower, but given public holidays in the UK and US, it is hard to tell whether contagion risk has been contained. After vetoing the appointment of a Eurosceptic economy minister, which triggered the collapse of the coalition government on Sunday, Italy’s president sought to calm political and market concerns by appointing Mr Cottarelli, a former IMF official, to run a technocratic government for at least until the end of this year.
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News of the collapse of the Italian anti-establishment coalition boosted the Euro during the initial London session yesterday, pushing the currency to an intraday high of 1.1728. But when markets opened in Europe, it became evident that an Italian technocratic government led by Mr Cottarelli, known as ‘’Mr Scissors’’ for his cuts to public spending in Italy in the past, was unlikely to win a vote of confidence by parliament with both Five Star and League fiercely opposing his appointment. As a result, Italy now looks more likely than not to head back to the polls late in the European summer with the election campaign likely to be run on Italy’s relationship with Europe.
The League, more so than Five Star, has enjoyed a rise in popularity in recent weeks, suggesting that in a new election they could be the party that outperforms. So the prospects of an anti-European Italian government has triggered a sell-off in both Italian bonds and equity markets. The FTSE MIB closed -2.01% and the Stoxx 600 Europe ended 0.32% down with Italian banks among the biggest losers. BTPs (Italian sovereign bonds) endured a brutal sell-off with the move lead by the front end of the curve. The 2y yield ended the day 40bps higher at 0.83%, taking the 2 year Italian-German spread to 160bps, 50bps wider on the day and its widest level since late 2013, towards the end of the Euro-Zone sovereign crisis. Meanwhile after briefly rallying at the open 10y BTPs closed 22bps higher at 2.66% with the spread to 10y Bunds ending the day at 232.7bps. The market has pushed the first (10bp) ECB rate rise out to October next year and safe haven demand for German Bunds spilled over into other major bond markets, with the US 10 year Treasury futures yield down 7bps (implying the 10y rate at 2.86%, its lowest level in over a month).
The EUR quickly gave up its gains from the Asian trading session dropping around 1% to an Intra-day low of 1.1608 before settling at 1.1624 where it currently trades. Worth reiterating here that given both the US and UK markets were closed for public holidays, thin trading conditions could have played a role on the price action,, so today’s session will be closely watched for any evidence of contagion risk.
Looking at price action in other currencies, moves have been reasonably contained. European currencies have followed the Euro lower with a higher beta fashion, both NOK and SEK have underperformed the Euro, falling 0.33% and 0.66% over the past 24hrs. Notably CHF did not enjoy a safe haven bid with the pair down 0.26% against the USD. JPY is stronger this morning after initially losing ground yesterday (USDJPY now at 108.90).
After trading to a monthly low of 0.7412 on May 9th, the AUD has remained contained in 0.7488-0.7605 range over the past 10 trading days and now the pair trades at 0.7540, sharply unchanged over the past 24hrs. The AUD has managed to hold its ground thanks to mixed to stable commodity prices and overall resilient risk appetite. So far Emerging Market concerns, geopolitics and now Italy have not triggered a wider risk off environment, so as along as contagion risk remains contained, the AUD is likely to remain supported.
This morning on the Economic Front we have Italian Consumer Confidence and Euro-Zone M3 Growth at 9.00 am. This is followed by US Consumer Confidence at 3.00 pm. Finally at 3.30 pm we have the Dallas Fed Manufacturing Index.
June S&P 500
So much for a quiet day with five of my markets getting hit yesterday despite both the UK and US Markets closed for their respective Bank Holidays. Yesterday after the S&P traded lower to my initial 2721 buy level we briefly bounced back above 2725 and I used this small rally to exit this position at my revised 2724 T/P level as I had a lower buy level in the Dow which was subsequently filled. This morning European Equity markets are opening weaker on the back of the worsening political situation in Italy with the S&P currently trading at 2708. Four times we have bounced of this level over the previous two weeks and the law of averages would seem to suggest that this support should be broken soon. If we do the next good support level is from 2691/2699 where I will be a buyer with a 2684 wider stop. Given the large gap lower from last Friday’s Chicago close I do not want to be short the market at this time. Remember the S&P has to break and close below its 50 Day Moving Average at 2674 for the market to turn short-term bearish.
EUR/USD
My Euro plan did not work well yesterday with the market trading lower to my average buy level at 1.1655 before stopping me out of this position at 1.1615. Subsequently I bought the Euro again at 1.1622 and I have now being stopped out of this position at 1.1590. The Euro has strong support at the November low of 1.1555 and this area should be difficult to break at least on the first attempt. The Euro is severely oversold, trading at the bottom of both its Williams Index and Daily Bollinger Band. The ECB will now do everything in their power to prevent a full-blown Italian crisis as the ramifications of allowing this to fester is massive. For this reason I will again look to buy the Euro on any further move lower to 1.1520/1.1560 with a 1.1485 stop. If I am taken long I will have a T/P level at 1.1610.
June Dollar Index
As I was already long the Euro I waited to sell the Dollar which I did at a price of 94.25. I am still short and I will now look to add to this position on any move higher to 94.75 with a now higher 95.10 stop. With the Daily Sentiment Index now at over 91% bulls it is only a matter of time before the Dollar reverses course and this reversal could be significant. Remember the last time we had such a reversal was in January 3, 2017 when the Euro was trading at 1.0341 and the Dollar Index at 103.40.
June DAX
Yesterday I was lucky with my DAX call as after the market traded lower to my 12910 buy level the market rallied to my tight 12945 T/P level and I am now flat. This morning the DAX has got hit hard trading to a low so far of 12690. Just before I posted yesterday morning we were trading at 13035. The DAX has initial support at 12735 but longs probably too risky here ahead of better support at 12650. Today I will look to be a buyer on any further dip lower to 12590/12650 with a 12530 stop. Despite the negative price action I do not want to be short the DAX at this time as I want to see if the market can close below the key pivot level at 12900 this evening.
June FTSE
After being overbought for most of the last two weeks we are finally seeing a correction in the FTSE with the market re-opening this morning 0.5% lower at 7650. I am still flat as the market targets good support at 7600. Today I will be a buyer on any further dip lower to 7585/7615 with a 7550 stop.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my initial 24720 buy level before rallying to my revised 24770 T/P level and I am now flat. The Dow has support at 24610 which is a two week low and below here at 24450. With such a large ‘’Open Gap’’ from Friday’s close it is unlikely that when the US Markets opens this afternoon that at least some of this gap will be filled. With this in mind I will now look to buy the Dow on any further dip lower to 24380/24540 with a 24310 stop. I still do not want to be short the Dow at this time especially as we have month-end on Thursday.
June NASDAQ
In the last few minutes the NASDAQ has traded lower to my 6930 buy level before having a small rally. I am still long and today I will now lower my T/P level to 6960. I will only add to this position on any further move lower to 6880 with a 6840 stop. Remember a break and close below 6850 is a strong sell signal.
June BUND
The BUND has now rallied over 550 points since last Friday week as one short position after another gets slammed. The market is now severely overbought as we trade outside the top of the Daily Bollinger Band and at the top of the Williams Index. Yesterday my Bund plan did not work as after the market traded the whole of my sell range for an average short position at 161.15 I was stopped out of this trade at 161.65. To compound matters I then went short the Bund again this morning at 162.20 before quickly being stopped out of this position at 162.55 and I am now flat. The Bund subsequently traded to a high of 162.80 on low volumes. In my opinion this move in the Bund is not sustainable given the fact that the yield is now below 40 bps compared to 2.85% in the US 10 Year Treasuries. Today I will again look to sell the Bund from 162.85/163.25 with a wider 163.55 stop.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1282/1290 with a 1275 stop.
Silver Rolling Contract
I am still long at 16.50 and I will continue to look to add to this position on any move lower to 16.20 with the same 15.90 stop. Sentiment remains compatible with a larger bounce and I will leave my T/P level at 16.70. Remember a break and close over 17.00 is a strong buy signal.
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