Mid-Day Report: Markets Further Stabilized by Government Interventions

Market Overview | Written by ActionForex.com | Oct 13 08 14:12 GMT |

The global financial markets continue to show positive reactions to the Eurozone's rescue plan and UK's bailout plan as well as dollar injection from major central banks. Some further actions are announced from Germany, Austria and France following the agreement made yesterday by Eurozone leaders. Dow soars over 400 points in early US session following broad based rally in the European stock markets. Dollar index dropped further and is now pressing 81 level while crude oil rebounds to above $80 level.

Germany Chancellor Merkel said the cabinet has passed the bank rescue package which includes up to 400b euros in bank guarantees, 5% provision of losses and recapitalization funds up to 80b euros. French Preside Sarkozy said an entity will be created to assist banks and guarantee limit will be up to 320b euros. Austrian Chancellor Gusenbauer also said that Austria will implement a 100b euros rescue plan which provide support to the banking system mainly via guarantees while the government is also allowed to buy shares in Austrian banks.

The Eurozone rescue plan includes state guarantees on bank debts until the end of 2009 with maturities up to five years. The governments are allowed to recapitalize financial institutions by buying bank stakes with preference shares or other instruments. ECB also pledged to look at enlarging access to the system of guarantees to include commercial paper even though it doesn't have the legal power to do so yet.

UK Government also said earlier today that it will invest 37B pounds in banks, including RBS, HBOS and Lloyds TSB, to boost their so called Tier One capital ratio to more than 9%. Australian government said it will guarantee all deposit with financial institutions for the next three years and all "term wholesale funding" by Australian banks operating in international credit markets. New Zealand government said it will guarantee retail deposits in New Zealand-registered banks, building societies, credit unions and deposit taking finance companies.

Fed said that ECB, BoE and SNB will conduct dollar auctions at maturities of 7, 28, 84 days at a fixed interest rate to offer financial institutions unlimited funds in response to demand on dollar loans.

Technically speaking, GBP/USD's break of 1.7398 minor resistance serves as an early indication that markets are further stabilizing. Though, further rally in Dow as well as retreat in dollar and yen are needed to confirm.

On the data front, New Zealand retail sales rose 0.4% mom in Aug. Swiss combined PPI dropped more than expected by -0.5% mom in Sep, yoy rate moderated to 3.7% versus expectation of 3.9%. UK PPI input slowed to 24.5% yoy versus expectation of 19.8%. PPI output slowed to 8.5% yoy comparing to expectation of 8.8%. Core PPI slowed to 5.4% yoy versus consensus of 6.0%.
GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.6831; (P) 1.7005; (R1) 1.7221; More

GBP/USD's break of 1.7398 resistance indicates that a short term bottom is in place. Intraday bias is now on the upside as long as 1.7108 minor support holds. Further rise could now be seen to test next resistance of 1.7843. On the downside, below 1.7108 will firstly flip intraday bias back to the downside for retesting 1.6786 low. Secondly it will argue that decline from 1.8668 is still in progress for 61.8% retracement of 1.3680 to 2.1161 at 1.6538.

In the bigger picture, a long term top is in place at 2.1161 and down trend from there is still in progress. Next medium term target is 61.8% retracement of 1.3680 to 2.1161 at 1.6538. The impulsive nature and the scale of the fall from 2.1161 also provides strong evidence to the case of the start of a long term down trend. Sustained break of 1.6538 will target 1.3680 (01 low).

On the upside, however, above 1.7398 resistance will also be the first signal that fall from 1.8668 has completed. Further break of 1.7843 will add more credence to this case. Also, this will argue that the five wave decline from 2.1161 has completed too. In such case, medium term outlook in GBP/USD will be turned neutral and expect some consolidation between 1.6786 and 1.8668 before resuming the long term down trend. Nevertheless, upside of the consolidation should be limited by 1.8668 resistance.

Economic Indicators Update
GMT  Ccy  Events  Actual  Consensus  Previous  Revised
21:45  NZD  New Zealand Retail sales M/M Aug  0.40%  N/A  -0.80%  -0.70%
7:15  CHF  Swiss Combined PPI M/M Sep  -0.50%  -0.30%  -0.50%  
7:15  CHF  Swiss Combined PPI Y/Y Sep  3.70%  3.90%  4.00%  
8:30  GBP  U.K. PPI core M/M Sep  -0.10%  0.10%  -0.10%  
8:30  GBP  U.K. PPI core Y/Y Sep  5.40%  6.00%  6.30%  
8:30  GBP  U.K. PPI input M/M Sep  -1.20%  -1.50%  -2.00%  
8:30  GBP  U.K. PPI input Y/Y Sep  24.50%  19.80%  26.20%  28.80%
8:30  GBP  U.K. PPI output M/M Sep  -0.30%  -0.40%  -0.60%  -0.70%
8:30  GBP  U.K. PPI output Y/Y Sep  8.50%  8.80%  9.70%  9.10%
  U.S.; Canada; Japan Market holiday