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How much hope do the Greeks have of staying in the eurozone?

16 January 2012  •  Source: Simon Denham, Capital Spreads

After a nervy end to trading last week investors remain cautious following the S & P’s downgrades of the likes of France and other European countries. It acts as a stark reminder that all is not well within the eurozone and the main threat now is not that other ratings agencies might follow suit, but that the EFSF bailout fund might be next. With talks for dealing with Greece’s debts breaking down last Friday there was a double whammy for the markets as fears over an eventual default increased, most likely in March when their next bout of refinancing is due. Without the full backing from Germany to back Greek debt and turn it into an attractive investment, the Greeks have pretty much no hope of staying in the eurozone. The money presses are standing by to be restarted and dish out Drachmas only a few years after they were put on hold in just over ten years ago.

The markets suffered decent losses on Friday as the rumours of the downgrades spread, but not quite as much as you might expect and since investors knew that France and others were on the S & P’s downgrade watch list, once the rumours became apparent that they were true, the market recovered from its lows.

This morning a bit of weakness has greeted the early session, but at the time of writing a few bids are pushing the market higher. The FTSE had consistently been called to open some 10 to 20 points lower which it did, but since then it’s just been drifting higher, however caution seems to remain the order of the day so far.

With US markets closed for Martin Luther King day trading will probably be thin and there’s no economic data due for release. The FTSE may have had a decent start to the year, albeit slightly spoilt by Friday’s decline, but it remains rather range bound, capped by strong resistance up at the 5700/20 area and support seen around 5350. If we cast our memories back to the first half of 2011 the FTSE spent months trading within the same range before finally breaking out to the downside. With so much uncertainty surrounding the eurozone it’s hard to see the market rallying to new heights, but at the same time there just seems to be enough optimism there to prevent a major crash.

The euro is facing a real uphill struggle at the moment and FX traders are going to find it tough to find any kind of reason to buy into the single currency. It hit an 11 year low against the yen and is approaching a 17 year low against the dollar, which is really carving the trend for safe haven currencies at the moment. Whilst Greece is on the brink of default, France and Austria lost their AAA rating and Italy, Spain, Portugal and Cyprus had their rating cut by two notches. The EUR/USD pair is trading around 1.2670 this morning and the trend could remain bearish as it continues to be capped by a downward trend line.

Investors may have looked at gold’s performance last week as though it was attempting to make a comeback, with news of possible further monetary stimulus in China and Europe helping spur on the bulls. But in fashion with Friday 13th, negative news from S & P about their downgrade on 9 European members’ credit ratings sent investors fleeing from gold and into the latest safety haven, the US Dollar. All in all, the precious metal lost 10.4 dollars to close at 1693.3, which at time of writing is slightly changed, with the yellow brick trading up at 1643.7.

For some, S & P’s downgrade on the 9 eurozone members wasn’t a shock, after many a warning from the credit rating agency. Investor’s will still be waiting to see any follow up on the matter though as attention has been swung back on Europe. On the other side, the possibility of a strike in Nigeria could disrupt oil productions, along with the unfinished sanctions against Iranian crude exports, meaning energy traders are staying on red alert, hence limiting the decline in black gold on Friday. This morning Brent is higher at 111.36 on the back of renewed tensions in Iran as they are seen to be threatening their neighbours if they replace Iran reduced output imposed due to sanctions.