Morning Report - Italian elections the key today, GBP to remain pressured

Nothing really matters this week except for the outcome of the Italian Elections which will start to filter out in Asian time today we'd guess and then Bernanke's walk up the Hill to give his testimony to the US Congress. 

On the former it is in the hands of the Italian people what happens but with regard the latter our guess is after seeing last week's fall in equities and increase in tension in the market Bernankewill try to soothe fears of an imminent withdrawal of stimulus.

Certainly the stock market will be looking for this type of reassurance and if Bernanke fails to deliver then this is a big risk for global stock markets and possibly a big support for the US dollar. But all things being equal the more likely outcome is stocks to be supported by Bernanke and the US dollar slightly undermined.

Just briefly on Friday's news the already embattled Pound was hit further by the down grade to its Aaa rating by Moodys. Sure it was only one notch but it just underwrites what a malaise the UK economy is in at present.  Moodys said that

The main driver underpinning Moody's decision to downgrade the UK's government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy,

GBPUSD has now broken both a big uptrend from the 2008 low as well as down through the bottom of the channel it has been in since mid 2010.

As we noted last week we are now targeting a move of about 10 big figures toward 1.42 over the months ahead. Looking at the dailies GBP is very over stretched with the crash of the last week which took it from the previous Friday's close above 1.55 to approximately 1.5150 last week.

The Euro was saved a little by the stronger than expected IFO Business survey in Germany which printed 107.4 versus 105 expected with the expectations component also strong printing 104.6 versus 101.3 expected.

We are looking for a test toward 1.3016 this week prior to Bernanke's speech which could be a good catalyst for a change.

The Australian dollar took on all comers last week rallying against the Major crosses as you can see below after comments from RBA Governor Stevens left the market in no doubt that the RBA's hands off approach to the Aussie is likely to continue. At the same time Stevens suggested that the hurdle for further cuts is quite high implying that the economic performance of the economy needs to undershoot the RBA's expectations if any cuts are to come. the NAB thinks they will the CBA not so sure. 

As can be seen in the chart below the Aussie is bouncing around in quite a wide range and although Friday night's close was not that flash in terms of where it has been a few hours earlier the daily charts are building momentum. But unless or until the box breaks its just a wild roller coaster ride around the same track again and again and again.

Turning to stocks there was a relief rally on the back of the German IFO data mentioned above and some dovish comments from the Fed Brotherhood in the US. After the swoon mid-week the Dow closed the week up 0.87% at 14,001, the S&P regained 0.9% of the previous two days 1.9% loss on Friday closing up 14 points to 1,516 while the Nasdaq was 0.97% to 3,162.

In Europe there was a strong rally with the FTSE up 0.71%, the DAX up 1.03%, the CAC fairly roared up 2.24% with Madrid up more than 2% as well while in Milan stocks rose 1.40%.

As we noted in our Weekly Summary, even though the S&P 500 finished the week on a better note the technical picture is deteriorating and last week's low must hold or a deeper retracement is in the offing. 

On commodity markets gold is sitting at $1,572 oz this morning after it tried to climb back inside the down trend but was likely rebuffed both by the technical damage done to the price during the week but also with the equity rally reducing the need for the golden safe haven. Gold's outlook in many ways rests not with itself but with other markets in the days ahead. Silver found some support for the third day in a row around $28.30 oz in MT4 pricing terms. Crude had further weakness below the previous day's low but recovered to have a small rally on the day closing at $93.36. Soybeans fell 1.78%, Wheat dropped 0.87% and Corn was largely unchanged.

Data

The Italian election is front and centre in our time zone today if/as news filters out about the results.

HSBC Chinese M'fg PMI is out with the Chicago Fed National Manufacturing Activity index out tonight together with BoC Governor Carney's speech which will be interesting to hear.