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Italy’s coveted A+ is no more

20 September 2011  •  Source: Simon Denham, Capital Spreads

The Dow’s little rally off its lows last night has not been enough to tempt buyers back into Europe this morning as investors continue in their bearish stance following a downgrade of Italy’s credit rating by S&P. Their coveted A+ is no more and on top of this they have been slapped with a negative outlook. This sounds like a case of we’ve heard it all before, as we all remember how the peripheral states all saw downgrade after downgrade pushing their government bond yields to unsustainable levels before requesting a bailout. Italy’s 10y government bond yield has been capped recently by the ECB purchases and it plummeted back to below 5% in August however since then has been gradually creeping back up again. This morning it’s higher again to 5.7% and judging by the chart it looks to be trying to get back above 6%. No matter what a country’s politicians do to try and temper investors with announcements of austerity, once the market has made up its mind it takes few prisoners. The problem with Italy is that its debts are so vast that there’s no way Europe will be able to bail them out and it is unthinkable just what ramifications of a default by them will have on the global economy.

The FTSE has been quite volatile overnight with our quote reaching over 5300 towards the end of the Dow’s session only to reverse those gains pretty quick and we’re now back in the mid 5200 range. Defensives are in favour again this morning and banks are a little lower but at least not anywhere near as much as the thrashing they got yesterday.

So the FTSE is looking at support around 5200 and then 5100 with near term resistance at 5300 and then the major barrier at 5375/5400. This trading range that we’ve been within since the sharp downside correction is reminiscent of the range bound trading we saw throughout 2011. At some point there will be a break out but for now clients are enjoying the moves between the highs and lows which provide much more docile trading conditions than what we saw in August.

There’s not much in the way of economic data today but investors will keep a close eye on the German ZEW survey which has been plummeting in recent months. The concern here is that if economic expectations amongst German businesses are going down the swanny, then Europe’s growth driver could suddenly see its economy take a turn for the worse.

The euro is having a small 60 pip jump this morning versus the dollar, despite the inevitable news that Italy has now joined the members club of eurozone countries that have been downgraded. After Standard & Poor cut their credit rating late last night, the euro took a dive as traders weren’t so keen on sticking with the single currency. Greece are still yet to come together on a deal with the IMF so that is also still at the back of traders’ minds. EUR/USD is currently at 1.3655 and near term support and resistance are seen at 1.3600/1.3520 and 1.3800/900 respectively.

Gold’s safety haven status was nowhere to be seen yesterday. Investors were drawn more to the greenback and government backed bonds for protection of their money, as riskier assets such as commodities were out of favour due to hovering concerns over Greek debt and US growth worries. If the current support is broken, then traders will look for the next technical level of 1750.0 and it will be interesting to see if there are any bargain hunters in sight.

Fear was caused yesterday by the lack of any firm rescue package agreement on the cards for Greece and markets in both the US and Europe helped push black gold lower. Along with this, the US dollar was given a strong boost on the back of these woes, which only added to the pressure on crude. At time of writing, the liquid commodity hasn’t seen much action, as it’s trading around flat at 109.39.