French Bond Auction Seen as Gauge of Investor Sentiment

Markets have been confined in ranges for the past few sessions and this trend continued in Asia, with risk assets slightly lower and the US Dollar making small gains.  Headlines out of Europe showed that instability in Spain (both with the private banks and within the government) continues to define the nation’s financial prospects but these stories only had a small effect on price activity during the European session.  The EUR/USD dropped back below 1.30 and while many analysts have revised their 2012 forecasts lower for the pair, the market remains heavily short, which can make it difficult for short term trends to continue.

Macro data out of the US continues to be supportive, and yesterday’s Factory Orders data was the latest example of this (coming in at a rise of 1.8 percent for November), which is one of the higher recent figures out of any of the G10 economies.  Comments from Federal Reserve Chairman Ben Bernanke were also released and centered mostly on the housing market and the need to implement strategies to improving that section of the economy.  Today, the data will be mostly employment related, and this will be important for gauging the actual print for the Non Farm Payrolls data released on Friday.

In the Eurozone, the main release is the Retail Sales number out of Germany and this will be followed by the next bond auction in France (where 8 billion Euros in government debt is on sale).  This bond auction will be key for understanding the market’s bias relative to the general confidence that is seen for the French economy and an unsuccessful bond auction will likely push the Euro lower.  At the moment, the long term credit rating in France is AAA, so pay attention to speculation that weak investor appetite for French treasuries could put this in jeopardy.

Services PMI in Germany was revised down in the December number (to 52.4) but overall the recent data has shown improvement so the impact was limited.  The services PMI in Italy, however, was much worse and came in firmly in contractionary territory at 44.5 for November.  The main concern here is the potential effect on fourth quarter GDP numbers, which is already expected to come in negative at 0.3 percent.

The GBP/USD is looking heavy after testing both sides of its hourly range and we have seen a break of the key support level at 1.5430 but we are still missing a daily close below the range to confirm the break.  The upside however looks limited as the momentum is clearly to the downside and any negative breaks should have significant follow through.  Resistance is still seen at 1.5770 as this is also where the 100 day EMA comes into place.

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The FTSE has taken the up escalator since the end of December and the MACD readings are bullish in positive territory but prices have since found resistance at 5680.  We might need to see some consolidation or retracement before getting another run higher, so the level we are looking at is the 38.2% Fibonacci level of the rally, which comes in at 5525.  Moving average levels are coinciding nicely with the Fibonacci levels so there should be some acceptable  long entries once prices retrace to these areas.