A bounce is ensuing after the substantial sell off in equity markets yesterday as both political and economic concerns make a lethal concoction for investors.
When you see the markets dump as they did it sets off a few alarm bells and justifiably so. The PMI numbers across the eurozone were truly terrible. The trend they are starting to take is worrying to the extent that the region could be heading for another deep recession as seen a few years ago if the debt markets continue to turn against the likes of Spain and Italy. No matter how much the IMF increases its coffers or the ECB’s President attempts to pacify the financial markets by saying that Spain and Italy are on the path to restoring their fiscal prudence, investors continue to focus on the fact that austerity is crippling them and without growth the current strategy looks doomed.
Sterling on the other hand continues to get a bit of a boost from those people who seem to think the pound is a safe haven during these times of uncertainty. It’s a vote of confidence in the currency considering that the BOE doesn’t look like it’s going to raise interest rates for quite some time, and whilst QE might be on the back burner for now growth is still completely flat lining, and if the eurozone situation worsens, it’s only going to make the UK’s going tougher. The problem of course with the pound getting stronger is that whilst it makes holidays on the continent that little bit cheaper, it causes problems for our exporters. A sector that has been showing signs of life in the past few years and has been able to remain relatively competitive because of a weaker currency, the edging higher is not particularly welcome as it’s the equivalent of tightening monetary policy.
Buyers were out in force yesterday in both the FTSE and in particular the Dax which saw the most spectacular falls. So far this morning they are being rewarded although the bounce is hardly awe inspiring. The London index is up around 20 points at 5885 and the bulls are hoping that support around 5635 with hold up. A break below here could see the next support areas of 5590 and then 5530 tested meanwhile to the upside 5770, 5830 and 5895 are seen as near term resistance.
Economic data comes in the form of the UK’s PSNB which is expected to hold around £15b, keeping the government in line with their targets. There might be a higher than expected number though as we saw last month as government departments rush to spend, spend, spend before the end of the fiscal year.
Later there’s lots of housing data from the US which should be watched just to see if that has an impact on US trade later today.
Instead of showing a slight pick up in services and manufacturing for Germany and Europe as a whole, the figures presented a worsening picture, casting fresh doubts an economic recovery might be around the corner. Consequently, the euro fell back below 1.3200 losing 61 pips for the day to 1.3156. For now, support at 1.31 held but a retest doesn’t look to be on the cards at the moment as EUR/USD is just higher at 1.3170.
Growing concerns that Europe is able to put its house in order sent investors to the safety of the US dollar and in turn pushed gold lower during the morning session. As a result we tested $1620 mark, mentioned in yesterday’s comment but somehow market participants remembered that gold too is a safe haven. So the precious metal managed to rebound, finishing only $4 down at $1637.45 and this morning is at 1639.
European economic troubles seemed to be deepening raising questions over oil demand going forward. Slower growth in China is surely another worry for energy investors. Surprisingly though, after slumping initially Brent crude pared its losses, closing near flat at 118.71 as opposed to a drop in WTI contract. Could that apparent strength be sustained given that Iran and the West started to talk? This morning Brent is a little lower at 118.40.