Intraday Market Thoughts

Sovereign Woes Hit Euro, US Debt Ceiling Concerns Recede, Gold Robust

by Ashraf Laidi
May 23, 2011 6:38

Credit downgrades on Friday have once again sharply refocused investor concerns about the finances and solvency of the peripheral European nations after Greece was downgraded by Fitch to 'B+'; with a negative outlook, saying that an extension of Greek bond maturities would be considered a default. Italy laced on negative watch.

The timing of the downgrade on the back of Luxembourg PM Junckers comments that Greece may need a soft restructuring raised fears about a contagion of the European banking system, something the ECB quickly recognised when it said it was vehemently opposed to such a step.

Of bigger concern was S&Ps downgrade of Italy to a negative watch citing weak growth prospects as well as concern that political deadlock would slow down the pace of fiscal reform.

Both Italy and to a lesser extent Spain had been able to distance themselves from the bond vigilantes in recent months, however, the move by Standard and Poors and this weekends Spanish regional elections have put the spotlight firmly back on these too big to fail economies.

Indications suggest that the ruling socialists have lost significant ground as Spanish voters punish them for a spiralling unemployment rate and severe fiscal austerity in the face of rising debts and a falling housing market. It also raises the prospect that the government will struggle to implement further austerity measures if the need arises.

European economic data due out later is expected to show that the German and French economies continue to do fairly well with May PMIs expected to show only slight declines from Aprils fairly good numbers.

Also be aware that ECB officials will be talking today with Tumpel-Gugerell, Ordonez and Bini-Smaghi making speeches on the European economy.

EURUSD sees key support at 1.4000, the 200 week MA, while hitting fresh lows against CHF on safe haven flows.

USD stabilized on the back of these European concerns, while worries about the US debt ceiling have receded somewhat given that Congress has until 2nd August to thrash out a deal. A break of 76.00 on the US dollar index could well see a test 76.60 the 100 day MA.

Gold prices have soared on the back of these fiscal concerns in Europe rising back near to all time highs against the single currency, near 1,075 an ounce.

$1.4135 & $1.6220 targets in EURUSD & GBPUSD calls from Friday's premium piece were hit. See Friday's calls on gold & silver. More in depth analysis on these can be found in our Premium section -

By KM - Staff


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