Italian Bond Auction to Guide Trader Sentiment

European equity markets are seeing declines in volatility but still managing to post gains for the week ahead of the next Italian Bond auction where nearly 20 billion Euros in Treasuries will be made available.  In the previous sessions, US markets closed relatively unchanged while declines were seen throughout Asia.  The Stoxx Europe 600 is showing gains of 2 percent for the week (but showing declines of 12 percent for the year), and trading above the 240 mark, fuelled by positive macro data from the US and a lack of negative headlines relating to the Eurozone debt crisis.

The main story in markets now is the continued lack of market participation and thin trading volumes, which is making price activity vulnerable to large swings into the Italian bond auction.  Stock exchanges in both England and Ireland are closed today but recent headlines have centered on the region’s job market which is now showing its lowest employment levels in nearly 20 years.  Some analysts projections have suggested that the total number of employed will drop by 125,000 next year.

In Greece, attention will start to turn to the national elections that will be conducted in April and so the current leadership (headed by Prime Minister Papademos) will look toward a goal of reaching loan and budget agreements in the next few months.  The added timeframe will give markets an opportunity to start assessing macro data releases (rather than simply trading off of erratic news headlines), so the most likely result here is that this alleviates some pressure on the Euro and on regional equity markets.

In commodities, Copper dropped in the London session on news that Japanese industrial production is showing slowing momentum and overall demand expectations continue to see weakness.  In individual stock shares, Deutsche Bank AG and Commerzbank dropped 2.5 percent as markets are weary of the financial sector ahead of the next Italian bond auction.  Tesco was up 2.3 percent (showing the best performance in the Stoxx 600) as defensive stocks and household goods continue to trade at elevated levels into the close of the year.



The EUR/CHF is trading at the lower end of its daily range with prices now near the support level at 1.2160.  The recent drop is suggestive of a test into the low 1.20s and we will need to see a break of both the 100 and 200 period EMAs as well as the 38% Fibonacci retracement near the breakdown point at 1.2270.  Ranges are really starting to tighten in this pair so we are expecting breakouts to have significant follow through once they occur.



The FTSE 100 continues to be caught in its longer term symmetrical triangle, with prices grinding through moving average resistance and the MACD indicator starting to flatten out in neutral territory.  The higher highs, though, are encouraging and it is looking likely that the eventual triangle break will be to the upside.  A break of support at 5280 reverses this bias and puts a downside triangle break in play.