European Equities Open Higher, EUR Drags Down On Greece

The FTSE 100 has made some tentative moves higher in early trade this morning led by the utilities sector and better than expected results from Babcock International. It should not be a surprise that Babcock International (LONDON:BAB) was one of the biggest risers on the FTSE in the immediate aftermath of the election results last week. With one of its key customers being the Ministry of Defence, the Tory victory implies that the Trident project is still a go and the resurgence in investor appetite looks assured.

A 32% rise in pre-tax profits to £417.7 million, a strong order book and revenue of £4.5 billion, shares have gained 20% over the past 3 months and now trade at 5 month highs.

Fresnillo (LONDON:FRES) is an early gainer adding 2.66% following its statement that it remained on track to meet its output guidance this year. Precious metals were out of favour in 2014 with silver prices falling around 20% but look to be stabilising and potentially staging a marginal recovery with prices increasing by $2 per ounce month to date. Shares in Fresnillo are now trading at 6 week highs and could pursue a move towards 800p should metal prices continue to rebound.

Recent macro data from the US has been fairly uninspiring yet home builders have been relatively optimistic. Last month’s NAHB Housing Market Index rose to 56 in April and is expected to show an additional rise to 58 today.

The Dow Jones is making early attempts in the futures market to break above its all-time highs. We are calling it up four points to 18276.

Euro softly squeezed as Greece reneges payment to the IMF

The EUR-complex has been softly ‘squeezed’ by news that Europe’s spoiled child may refuse to pay 750 million euros due to the IMF. While Asian traders showed little-to-no reaction to the news the European opening has been a bit choppy with no particular signs of stress compared to how serious the issue may become. In their current vicious spiral, Greek banks have certainly not more than a couple of weeks to run before insolvency. However, it seems the EUR market is already well prepared for a potential Grexit. Although a potential default occupied the headlines since weeks –if not since months, the CFTC data showed that the speculative short positions in euro fell to -179’000 contracts on week to May 12th, that to say, the lowest level in two months.

Today is certainly not the best time to jump into fresh strategic longs in EUR crosses, yet traders do not rush toward the exit door on existing positions. Intraday rallies in EUR/USD and EUR/GBP should be fragile as traders will be tempted to cash in profits on tactical longs to avoid taking the downside risk for too long. However the faith in a potential advance to and above 1.1500/50 versus the US dollar is not dead. Versus the pound however, the technical indicators suggest a deeper downside correction should the 0.7200/50 is cleared (area including 50 and 100 day moving averages and psychological pivot).

UK inflation in focus

Talks on the UK economy and the BoE outlook continue this week with the first inflation release following the latest Quarterly Inflation Report. The headline inflation is expected 0.4% faster on month in April versus 0.2% printed a month ago, while the core inflation should have stabilised at 1.0% on year to April. Although the BoE Governor Carney delivered a somewhat dovish monetary policy statement, he couldn’t avoid speculations that some of the MPC’s voting members may quickly switch to the hawkish side. Although the appetite in pound is weaker this Monday, the risk-off sentiment and the safe heaven flows should keep the 200-dma as a solid support.