The new optimism following the approval of the rescue plan for Greece could support the European currencies and crude oil toward April’s high. In the U.S., instead, an agreement has to be found yet, while August deadline is quickly approaching.
EUROPE: Solution found, would it be enough?
July 21/11 has been another hot day for Europe, as leaders gathered in Brussels looking for a solution to the sovereign debt crisis spreading across the continent. In an emergency meeting, European officials approved an additional Euro 109 billion rescue plan for Greece on the top of more financing provided by the International Monetary Fund (IMF). Loan maturities were increase from 7.5 years to a minimum of 15 years, while interest rates reduced from 5.5% to about 3.5% (Ireland and Portugal were also included in this deal). Will it be enough to calm the financial markets and to boost optimism in the Old continent?
Yes, over the short term. The measures appear to tackle the problem like never before and financial markets no longer need to fear Greece bankruptcy spreading into the banking sector. For the first time in the history of a unified Europe, nations have structured a plan to proactively face the financial challenge, instead of simply reacting to it. This renewed optimism, along with favourable seasonal conditions, could continue to support European currencies (Euro and Pound) and crude oil. The precious oil could move toward 112/115 on the September futures contract, if the price of 104.90 is cleared. It would complete the large head and shoulder formation that started in April.
U.S. Last minute deal served?
Considering that in the U.S a deal over the debt ceiling has not been found yet. The deadline of August 2, after which Washington capacity to repay debt obligation should expire, is around the corner. A last minute solution, which might include an upfront smaller deal with a larger package to be discussed later on, is still in the cards. A default scenario is possible, but improbable. The U.S. Treasury market is highly liquid and remains a safe haven during storming times. Furthermore, the Federal government income is less than 20% of the Gross Domestic Product (GDP). This would give the Congress room to manoeuvre, if need it.
Over the medium term, however, systemic challenges are still in place in Europe and profound reforms are requested. The European policy of increasing taxes, cutting government spending and rising interest rates could penalise the local economy. Signs of a slowdown are already evident. In July, the PMI composite business index fell other 2.5 points to 50.8, near the low of November 2008. The manufacturing sector was particularly hit and declined to 49.5, eventually anticipating a contraction of the European industrial production in the months ahead. Growth is shrinking in key nations such as France and especially Germany, where both the ZEW and IFO indexes fell. The first, which tracks the sentiment of 300 investors and analysts regarding business trends, declined for the fifth consecutive month. The IFO business climate showed instead the largest drop since 2008, although remaining near the highs.
Euro: meeting resistance.
Technically, the European currency remains in uptrend, but needs to move above 1.4630 to target 1.48, eventually 1.50. Crude oil, instead, shall clear 104.90 to climb to 109, 114 on the September futures contract.
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