A negative start to today’s session and the continuation of weakness so far this week is starting to cast doubt in the minds of the bulls since this rally commenced back in October of last year.
The euphoria over Greece has died down now and the focus is shifting onto other eurozone nations in particular Spain. The Spanish economy is very significant as it’s the fourth largest in Europe and has just slipped back into recession. The country is slowly but surely becoming the next elephant in the room and the more people say that a country does not require financial assistance in the form of a bailout the more investors doubt them. We’ve seen too many times before protestations from the likes of Greece, Ireland and Portugal only for them to require a bailout months later. Austerity measures in Spain are an all too familiar story and in a country where unemployment is at 23% there’s little in the recent measures set out by the conservative government there that inspires confidence about growth. Without growth then the deficit will not be reduced and we could be looking at the next domino to fall. Whilst the funds and firewalls set up to protect against such an event are perfectly capable of dishing out a few more billion for the likes of Portugal or even Greece if they need it, Spain is a different matter due to the size of its economy. Then of course there’s the real worry that the markets might turn to Italy after that. Let’s not hope that this happens as then we would really see another very deep and entrenched recession across the globe.
So the concern about the eurozone that has re-emerged is putting a dampener on the strength of the markets so far this year in the first quarter. We have been on course of some really impressive gains and whilst this is still the case for the likes of the German Dax and French Cac, the FTSE has been very sluggish, at one point posting gains of over 7% but now we’re only looking at half that.
This morning the weakness from across the pond has rubbed off on Asian markets which have had a bad month in March and this in turn is influencing the Euroepan indices on the open. The FTSE is at 5790 at the time of writing and bulls and bears will be watching the near term support and resistance levels seen around 5760, 5710 and 5845, 5880, 5950 respectively. Whilst our quote has just been edging higher in the run up to the open the continued rejection of the highs gives the feeling that there might be some more give to the downside. Whilst the longer term rally is still intact, in order for it to continue there has to be a bit more of a retracement in order to attract the buyers back in earnest.
There’s quite a bit of economic data out today and we kick off with the German unemployment figure which is expected to show that the biggest economy in Europe is not suffering from the same labour markets as other European countries. Unemployment is expected to decline and the rate there which stands at 6.8% could even fall to 6.7%, a multi-year low.
In the UK there’s an index of services data release which might give us an insight into what to expect from the first release of Q1 GDP at the end of April. This is a very topical number now following yesterday’s surprise revision downwards of Q4 GDP and services output is expected to rise by 0.2%. It’s an important figure considering that services makes up some three quarters of the UK economy. Also from the UK this morning there’s mortgage approvals and consumer credit. Many mortgage providers have just upped the interest rate on their standard products making house finance that little bit tighter but with the stamp duty for first time buyers returning next month there is expected to have been a rush to buy houses so this number is expected to rise.
Then to finish the day off there’s the final release of US GDP which could determine how we end today’s session and possibly the week and quarter as a whole. The US economy is growing at 3.0% but as Bernanke keeps reminding us it is fragile so all eyes on this data at lunchtime.
On the currency front things are mixed with the EUR/USD trading at 1.3330having largely drifted sideways for the last few days. The risk aversion in the equity markets and concerns over Spain has not really affected the euro as one would expect, but for now further gains look to be capped.
Gold couldn’t hold onto its recent strength once again calling into question whether the bulls have the momentum to drag it back above 1700. This morning the precious metal is at 1662.
Talk of dipping into strategic crude oil reserves has served to bring the price of Brent back from its highs, but it still remains above 124 at 124.25 this morning. In the past month crude prices have simply moved sideways and this isn’t making petrol at the pump any cheaper. With possible strikes in the UK next week people are likely to start stockpiling – acting upon the advice of the government (!) – and soon we might see pumps run dry.