Both major European central banks have thrown their rulebooks out the window with the ECB making a snub at the ratings agencies by saying they’ll continue to accept Portuguese debt as collateral regardless of whether they say that the country has defaulted.
This is effectively giving investors in the peripheral eurozone countries a free bet which is why we haven’t seen the initial sell off from the Moody’s downgrade on Wednesday cause more of a sell off in equities. In fact the reverse has happened and once again we see markets happy to move on higher as investors feel that regardless of what the credit ratings throw at the PIIGS, the eurozone will still muddle through it all and the ECB will bail them out.
For the BOE they too seem to have ripped up their rules by completely ignoring inflation altogether. Ever since the departure of MPC member arch hawk Andrew Sentence, the rate setters have become much more dovish which has caused sterling to get beaten up a little and shown the market that price stability is simply not on the agenda for them, rather as Bill Clinton used to say “it’s the economy stupid”. It’s now been going on for years whereby the BOE should actually be hiking rates to reign in inflation because that is their sole purpose, but they are preoccupied with the state of the economy (and rightly so considering the state of affairs we’re in), so isn’t it time we just changed their remit? Surely making them responsible for growth as well as inflation, more along the lines of the Fed, is a natural course for them to take.
The FTSE started just on the side of the angels but has pulled back to flat at the moment and so is trading at 6055. Bit by bit we seem to be taking out the near term resistance levels and it’s been remarkable how the index has been so quick to try and get back to its highs in such a short space of time. Now the targets for the FTSE are seen at 6090/6110 and the 2011 highs at 6135. To the downside a break below 6000 might open up the way for 5935 but you have to feel that today’s main highlight, the NFP, will have to be very bad in order to see us head back down there.
So non farms are the big figure of the day and if they’re anything like yesterday’s ADP number we could be in for a continuation of the rally. Analysts scrambled to issue new forecasts following the huge jump in the ADP measure yesterday and earlier in the week expectations were for a figure of 80k, this is now over the 100k mark.
The euro had a tasty rally against the dollar after the ECB raised rates to 1.5 percent yesterday, from 1.4220 to 1.4374. As mentioned, Trichet’s announcement to allow Portuguese bonds to be used as collateral was another catalyst for the euro, but saying that, it hasn’t done much to help the single currency this morning. The euro is falling away and currently trading around 1.4316 versus the buck.
After the BOE kept rates on hold at 0.5 percent the dollar continued its offensive on the pound, making it three down days on the spin. The UK has PPI figures out today, which is expected to show a slowdown for June. Cable is currently trading at 1.5963, levels not seen since June 28th and as with the euro/dollar situation, sharp movements can be expected over the NFP figure today.
The yellow metal is in profit mode this morning just a few bucks in the red and at 1527. Back above the 20 and 50 day moving averages bulls are hoping for a re-test of 1550 and then a push on higher, but the moving averages have made their bearish cross and so there’s a pause for breath as the last time this happened earlier in the year we saw a move lower of some $80.
Gold’s cousin silver seems to be battling around the $36 mark and it too is seeing a little profit taking bringing it to 36.15. Clients remain heavily long in both metals in the hope of the next leg higher.
Crude was the big winner from yesterday’s ADP number. Anything to suggest the world’s biggest economy is in good shape will send the black stuff higher and as a result we saw a $4 spike taking Brent back above $118 where is remains this morning at 118.20. The NFP will almost certainly affect crude prices if the figure is a long way off expectations and any bad number could lead to some profit taking.
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