Sterling Sees Gains as UK Gilt Yields Continue to Move Lower
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The regular Financial Markets Update from Simon Denham of Financial Spreads.
For today's update >> Financial Markets.
Spread Betting 15 December 2011
Yesterday’s sell off indicated that investors are getting more and more nervous about the state of affairs in the Eurozone.
The fact that the indices spread betting markets haven’t sold off further, and that they are bouncing in early trade so far this morning, comes as something of a surprise.
Despite all of the efforts being made by European leaders, a possible break up of the Eurozone is becoming more and more likely.
Signs that people are preparing for such a break up are already being seen as money presses for individual currencies such as the Drachma and even Deutsche Mark are ready to go at a moment’s notice.
In addition, the world’s biggest inter-dealer broker has been testing its execution systems for currency deals in the event of anyone exiting the Eurozone.
As a result the euro has taking a pounding, most literally too as sterling looks increasingly like more of a safe haven than many other currencies.
GBP/EUR has been heading back towards €1.2000, but just this morning is running out of steam and the interest on UK gilts continues to head lower as investors buy up UK government bonds as a safety precaution.
This once again indicates the faith the bond spread betting market has in the coalition’s deficit reduction plans, even if they are going slightly off target due to the lack of growth.
Even though the European debt crisis has dominated financial markets throughout 2011, and seems to have been all this column has been writing about, there seems to be little prospect of that changing into the New Year.
As mentioned the FTSE 100 is in bounce mode this morning and, as we are now in the middle of December, this tends to be the time that the bullishness in the run up to Christmas really gets going. However, for the index to get back into positive territory for the month it has to climb another 90 points from its current price of 5415.
UK retail sales will be closely watched today and already we’ve had some German PMI data that has come out much better than expected, giving equities this little early boost.
There will also be lots of US economic data around after lunchtime with the weekly initial jobless claims, industrial production and then the Phili Fed.
With global equities dropping like a stone over concerns that a Eurozone debt resolution will not be reached anytime soon, the euro was inevitably only going to go one way.
The single currency dropped below the big psychological level of $1.30 which, as we said a couple of days ago, was the low last January and subsequently the next downside target.
The EUR/USD spread betting market is pushing higher this morning to around $1.3030, but traders should tread with caution as we’re in a bear market and any upside is likely to be limited to the very short term.
Dragged down by the heavily slumping euro, investors saw gold drop to levels not seen since late September. The metal broke through the psychological support level of $1600.0 and didn't stop there as it carried on falling, ending the session down $57.4 bucks at $1573.7.
The reason for the third bearish day in a row was the worsening state of the European economy, pushing traders into the safety of the US dollar and out of commodities.
A few months back, risk adverse market participants would turn to gold as a hedge against turmoil, but the tables have surely turned and now any sign of a downturn and the yellow brick is dumped.
The next test is $1532.0, which will be the lowest level seen since early July, but at time of writing, the price is shying away from this level and is trading up at $1584.9.
As with gold, crude oil fell victim to the bears yesterday with investors finding sanctuary in the US dollar.
The decision from OPEC to raise their output ceiling to 30 million barrels didn’t help the situation either, nor the US Department of Energy showing a bigger than expected build in gasoline stocks.
At time of writing, black gold is trying to rectify some of the damage and is trading up at $105.54.
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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'Sterling Sees Gains as UK Gilt Yields Continue to Move Lower' edited by SD, updated 15-Dec-11
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