SCOREBOARD: Mixed signals

Uncertainty over possible European bank downgrades battled with positive US data overnight.

*This commentary was written prior to the release of US jobless claims and inflation data, which spurred a turnaround on Wall Street.

Stocks have been under pressure today as indecision and uncertainty over whether the Greek debt crisis could spark another global financial crisis has bred confusion and indecision among traders.

Moody’s announced overnight that it has placed the credit ratings of 114 European banks under review for a potential downgrade. While this may have been expected in the wake of the ongoing financial crisis and recent sovereign downgrades, what really appears to have rattled markets today is that Moody’s also put 17 global banks based in other regions including major US banks under review and suggested that banks with large capital markets operations could face cuts of two or three notches.

This has reminded that street that the banking system is global and financial problems in one area can impact banks around the world. On the other hand, continuing this week’s theme of mixed signals and indecision, another successful Spanish bond auction suggests that many expect the crisis to either be resolved or contained to Greece and maybe Portugal.

It now looks likely that a final decision by eurogroup finance ministers will be made on Monday along with the long awaited bond swap, however it could all unravel well before then with European officials talking about withholding any new funds until after a Greek election, when there would be more certainty about the political make-up of the country. Greek finance minister Venizelos in response has accused EU leaders of "playing with fire”.

EU officials are talking about dealing with the March bond redemption from existing funds from the first bailout, which apparently still hasn’t all been allocated.

It seems the northern European countries are the main drivers behind this new firmer line as alarm increases about any additional costs that would need to be borne further down the line.

Reports from eurozone officials that the troika must have a permanent authoritative presence in Athens, along with sole control of an escrow account for bailout disbursements before any deal could go ahead have served to inflame an already fractious situation. Insistence that politicians from all the political parties must sign an undertaking not to unpick the bailout terms are likely to fall on deaf ears from the minority parties. These conditions also give the impression, wrongly or otherwise that EU officials are trying to force Greece out by putting conditions in place that they know the Greeks would never agree to.

All this has been set against a backdrop of negative growth across the board in the fourth quarter in Europe, with the latest GDP numbers from Spain contracting 0.3 per cent, in line with expectations.

The reaction from the street has been to flee equities, particularly bank stocks, and flow mainly back into US dollars which has swamped other defensives such as gold and yen. The euro has been driven back down toward $1.3000 dragging Swiss francs, krona and krone along with it, while sterling has outperformed its continental peers holding essentially flat. Sterling continues to stabilise in the $1.5660 to $1.5700 range. Commodities have also been retreating a bit although US crude has been able to hold above $100.00/bbl. Still, this retreat has weighed on resource currencies, knocking Canadian dollar back under par. The Australian dollar held $1.0675 overnight, a higher low and has rebounded above $1.0700 with next resistance near $1.0720 then $1.0750.

Although economic news out of the US has been positive today, and has given some markets a bit of a reprieve, it appears that the street may remain fixated on the Greek situation through the weekend.

US initial jobless claims fell to 348,000 last week, better than the 364,000 street estimate, while US housing starts were 699,000 last month, better than the 672,000 street estimate. December starts were revised upward to 689,000 from 657,000. US producer prices were up 4.1 per cent year-on-year, in line with expectations.

Last night’s release of the latest FOMC minutes from the January Federal Reserve meeting showed that there was less unanimity with respect to the extended low rate policy than was first thought. The downbeat nature of chairman Ben Bernanke was reinforced by the minutes; however there was less support for further QE in the near future than had been previously thought, with the likelihood of further easing unlikely until the fourth quarter at the earliest.

On Wall Street, the Dow Industrials fell from 12,950 yesterday, but has bounced up to close at 12,904.08 points, with initial resistance near 12,790 then 12,850. The S&P 500 was consolidating in the 1,340 to 1,355 area, rising to close at 1,358.24. Meanwhile, the Nasdaq ended 1.51 per cent, or 44.02 points higher, at 2,959.85 points. On European markets, the FTSE completed a bear trap dip below 5,840 overnight and has broken out over 5,860 with next resistance near 5,885 then 5,920. The DAX retreated overnight but has bounced up off of 6,660 through 6,700 with next resistance near 6,740.

In commodities, US crude oil has been holding in steady today consolidating recent gains in the $101.20 to $101.80/bbl area. UK crude continues to drive higher, taking a run at $120.00/bbl with next resistance after that near $120.50 then $121.75 on trend with initial support near $118.75. Gold continues to trend lower, having failed at another lower high near $1,720, gold has dropped back toward $1,710 with next support near $1,700 then $1,675. Silver has broken down through $33.00/oz with next downside support near $32.50 then $31.70.

Colin Cieszynski is a market analyst/education manager, CMC Markets Canada. Michael Hewson is senior market analyst with CMC Markets UK.

Regular Scoreboard columnist Adam Carr is on leave.

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