DON’T COUNT ON A MERKEL – SARKOZY DEAL

 
David Morris
I’VE been abroad for the last two weeks which has meant that I managed to miss the unpleasantness of the riots, and the market volatility of the past fortnight. As I left the country, Congress and the White House were still at loggerheads over raising the US debt ceiling. Now I’m struggling to find any direct mention of the deal. Yet S&P lost no time in downgrading the US credit rating in a move which was seen as highly controversial, but merely followed China’s Dagong Global Credit Rating agency which has already downgraded the US sovereign rating twice in the past ten months.

For the major stock indices, many significant technical support levels were smashed in the first week of August. The speed and severity of the sell-off made it difficult to trade, although last week saw equity markets steady and reverse some of their losses. This followed the US Federal Reserve’s statement that it could leave rates unchanged into 2013, and a partial short-selling ban on certain stocks in Europe. The S&P 500 appears to have found support between 1,100 and 1,120 which corresponds to the 38.2 per cent fibonacci retracement of the fall from October 2007 to March 2009, and the 50 per cent retracement of the rally from March 2009 to April 2011. A break below here could see the index retest the 1,000 level. The area between 1,200 and 1,210 offers the first major line of resistance.

The second quarter earnings season is winding down now. Once again, the largest US corporations reported decent profits. According to Thomson Reuters, with the results in for 92 per cent of S&P 500 companies, 71 per cent have beaten analysts’ earnings estimates. Yet the escalating debt crises in Europe and the US overshadowed the reporting season, and kept equities under pressure.

Today’s main focus is on the meeting between German chancellor Merkel and French president Sarkozy. Hopes were growing yesterday that the two leaders were ready to take drastic action to help curb the debt crisis, with speculation that the creation of a Eurobond would be agreed on. However, German officials insist that no one should expect anything major to come from the meeting. Nevertheless, traders and investors are quietly hoping that the two leaders will say something significant.