The uncertainty continues to muddy the waters for investors as the two major concerns remain unresolved.
The European stress tests over the week end were interpreted as a bit of a sham by investors who aggressively sold banking stocks for fear that a sovereign default could cause a Lehman II style crash. This would be well and truly catastrophic for not just Europe but the global economy as the banking system would lock up again just as it did in 2007 during the credit crunch and funding to businesses and individuals would freeze, sending us spiralling back into recession. This is an extreme scenario, but investors were pricing in the possibility yesterday which is why banks got hammered.
For now at least investors feel that the market might have sold off a little too much and have seen this level as a good buying opportunity. The German Dax and French Cac are motoring ahead with the Dax rallying 80 points in only 15 minutes. These indices have been seriously battered due to their banks’ exposure to Greece and the like, so this morning investors are happy to pick up equities that look to them like a bargain.
Things are similar for the FTSE which is seeing buying interest but not quite to the extent of the Dax. At the time of writing we're at 5780 with the bounce being mainly attributed to a recovery in US indices late on in their session after some decent US earnings. On that note the big Wall Street names to report today are Apple, Goldman Sachs, Bank of America and Yahoo.
There’s no UK economic data today but investors will probably watch Germany’s release of its ZEW business survey. Expectations and current conditions are due to fall, unsurprising considering what’s happening on their doorstep and this could well indicate the turning point for Europe’s biggest economy which has been booming over the past few years.
Whilst European government bonds yields are hitting lofty heights not seen for years, it further fuels concerns about the euro zone situation. As traders are still waiting on a decision from European leaders regarding a second bailout for Greece, the euro continues to fall. That being said, the euro has rallied this morning 80 pips, in line with increased risk appetite and rising equity markets and is currently trading around 1.4160.
Sterling has also jumped on the bandwagon early morning and is trading around 60 pips higher versus the dollar at 1.6120. As traders’ taste for risk is very much on the up today, safe havens such as the dollar appear less attractive and in line with rising equity markets we could see sterling push higher.
Fundamentally and technically, gold’s ceiling has been removed and now all that stands above the precious metal is thin air. The situation in Europe with Italy coming under scrutiny is spurring the yellow brick on and in Washington lawmakers are still far from a deal despite the fast approaching deadline (August 2nd). Adding fuel to the fire, we also have Japan struggling to recover and the unrest in the Middle East still not being over. So seeing a 10 dollar gain yesterday, pushing the hedge up to 1603, was not a surprise. At the time of writing we’re still marching on, up to 1609. The precious metals white cousin has also been mirroring these gains and yesterday, even out performing in percentage terms. Currently the white metal is at 40.81.
Pushing crude prices lower yesterday were investors worrying again about contagion in the euro zone and a potential spill over into the energy complex reducing demand for the black gold. However, strong demand from China still growing and persisting unrest in the Middle East and North Africa regions should limit the damage to crude prices. Let’s just hope no one mentions ‘Default’.
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