Euro and Stocks May Fall on Gloomy Data, Italy Instability Fears

TALKING POINTS – YEN, AUSSIE DOLLAR, EURO, STOCKS, ITALY, PMI, RETAIL SALES

• Aussie Dollar struggles to make good on a second day of upbeat data flow

• Yen may extend gains as bellwether stock index futures hint at risk-off bias

• EZ and US data flow, political jitters in Italy may sour market sentiment

The Australian Dollar failed to make much of a second day of supportive economic data flow. The currency was unable to sustain a brief upward spike following better-than-expected jobs data having similarly shrugged at outperforming Chinese GDP data just the prior day.

Furthermore, the sentiment-linked Canadian and New Zealand Dollars faced noticeably concentrated selling pressure while the anti-risk Japanese Yen traded broadly higher. In all, this seemed to imply a broad-based defensive pivot across the G10 FX space.

Most Asia Pacific stocks traded tellingly lower. Healthcare names led the decline, echoing a similar dynamic on Wall Street. Futures tracking bellwether US and European equity index futures are pointing meaningfully lower, hinting at continued de-risking in the hours ahead.

EUROZONE AND US DATA, ITALIAN BUDGET WOES MAY COOL RISK APPETITE

Eurozone PMI figures are now in focus on the data docket. The regional composite gauge is expected to show a pickup in the pace of manufacturing- and service-sector growth in the single currency area in April. However, the projected rise would still put the index within a hair of Januarys near-five-year low.

Furthermore, political instability fears may overshadow a PMI uptick. Lawmakers in Italy are set to debate the governments latest economic forecast updates. These brought sharp downgrades of growth and budget deficit projections.

Traders will be keen to listen along, looking for signs suggesting that another clash between Rome and EU authorities in Brussels is ahead. For its part, the administration seems to be hoping that a round of privatizations will allow it some space for deficit reduction.

If it appears that Italy will struggle to bring down the budget shortfall in line with last years commitments – stoking political instability fears as regional bigwigs are pushed to consider penalties on the eve of already troubling European Parliament elections – risk appetite and the Euro might wilt.

Analogous US PMI statistics as well as the retail sales report could compound negativity. Data flow out of the world‘s largest economy has increasingly disappointed relative to baseline projections over recent months, hinting analysts’ models are overly optimistic and setting the stage for continued underperformance.

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CHART OF THE DAY – S&P 500 CHART WARNS BEARISH REVERSAL MAY BE IMMINENT

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Bearish cues continue to build up in S&P 500 technical positioning. The appearance of a Rising Wedge formation along with negative RSI divergence have been warning of a looming top for some time. A series of indencisive candles with telltale extention at the upper wick – speaking to failed forays to the upside – is now seeing tepid follow-through toward the Wedge floor.

Confirmation of reversal requires a close below this as well as the 2865.00-78.50 resistance turned-turned-support zone. Such a move would initially expose the next downside barrier in the 2807.50-24.25 area. The broader implications would be weightier however, arguing for a double top having been set below 2950 and beckoning a lasting risk-off pivot across worldwide capital markets.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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