Italian Bonds Fail to Rally Despite Rumours of Chinese Involvement
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The regular Financial Markets Update from Simon Denham of Financial Spreads.
For today's update >> Financial Markets.
Spread Trading 13 September 2011
China comes to the rescue of Italy as they show their support for Europe’s third biggest economy.
You have to wonder how long it’ll be before other European states go cap in hand to the Chinese.
If fact China has already been purchasing large amounts of Euros and European sovereign debt so what we are seeing isn’t anything particularly new or ground breaking. What it does do is remind us of our reliance now on the world’s fastest growing economy.
As a result the response from Asian markets was rather muted and European indices have opened quite a bit lower than our original calls. The FTSE is in the mid 5100 region when we were expecting an open of plus 5200.
Italian bonds have hardly battered an eyelid following the news, with yields pretty much where they left off from yesterday. As a result, everything about today’s little move higher for the stock market indices has a bit of a short squeeze feel about it.
Encouragingly though the FTSE has bounced off the 5050 area once again and this remains the crucial support level for the index.
European indices, in particular the French CAC which got seriously bashed around yesterday, are making tentative gains but as things stand this morning it’s hardly a move that screams “the sell off is over”.
Having said that, our spread betting account holders seem to feel that more gains can be made and the FTSE could get back above 5200 to test 5300 and possibly beyond.
They bought into the index yesterday and those longs on the whole remain in place. If past behaviour is anything to go by though I can foresee that if we do test 5400 again those same clients will close their longs and go short.
The worrying thing for investors in the FTSE is that whilst its European counterparts have broken to new lows for the year, the FTSE has not. It may turn out to be a matter of time before the London market gives up its support and tests the 4800 area again.
Investors seem to be on a knife edge with the battle between bulls and bears finely balanced and at some point one group will gain the upper hand.
CPI numbers from the UK are worthy of note, but really that’s about it on the economic data front. Inflation is expected to have risen in August, being pushed by higher utility bills and petrol prices.
Inflation remains way above the BoE’s target at over 4% but we can’t expect them to do anything about it by raising interest rates as they have specifically said that they won’t.
It sounds like a broken record, but the Eurozone debt situation is intensifying and this is of course, giving the Euro a real tough time.
It squeezed against the Dollar yesterday as traders were speculating on the ECB cutting rates over the next year, but clearly it was short lived as the Euro dropped around 60 pips against the dollar when the market opened this morning. The pair is trading at $1.3625 currently.
The last time the Euro was trading at these levels against the Yen was in June 2001 and it appears that traders see the Japanese currency as the strongest safe haven at the moment.
This is down to their current account surplus which means they don’t have to rely so much on foreign capital. This morning the EUR / JPY forex pair is trading at ¥104.82.
Banks on the French stock market were one of the reasons for the drop in gold’s price yesterday. They’re rumoured to have a large exposure to Greece, which is on the brink of bankruptcy.
As a result, investors were yesterday preparing for chaos and removing their money from assets and into their mattresses after taking more seriously the saying “cash is king”.
The yellow brick lost in total $43 to end the session at $1813.6, the support provided around the $1800.0 level. At time of writing, potential hedgers are seeing a small bounce, as the precious metal is trading at $1823.0.
Crude prices tailed the Euro yesterday as headlines were filled with European debt woes.
The rumours of a downgrade on French banks by Moody’s sent the single currency head over heels and fears of reduced oil demand were spurring on the sell-off in the energy markets.
Nevertheless, as the Euro rebounded, so did crude, possibly as investors closed their short positions amid profit taking. Brent is currently trading at $112.72.
The above comments do not constitute investment advice and neither Financial Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Italian Bonds Fail to Rally Despite Rumours of Chinese Involvement' edited by SD, updated 13-Sep-11
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