Stock Market Indices See Gains After German GDP Inspired Declines
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The regular Financial Markets Update from Simon Denham of Financial Spreads.
For today's update >> Financial Markets.
Spread Trading 22 August 2011
Markets are opening slightly lower as Merkel holds firm in not committing Germany to picking up the ‘tab’ for every country in Europe.
She is well aware that she would never be able to force such a commitment through the electorate. However, even if another party were to win at the next election, we all know that some form of compromise must be forthcoming.
But aside from the problems with the sovereign debt in Southern Europe it must be admitted that everyone does seem to have gotten very pessimistic over what are merely poor numbers rather than actually critical. Although this ignores the alarming Philly Fed figures on Thursday, which we will need confirmation of.
Financial spread betting investors seem to be as likely to take the recent weakness as a buying opportunity as look at all the negativity swirling around and take an outright bear position.
As mentioned several times over the years, I am a general believer that governments serve their people best when they do absolutely nothing.
I always thought that John Major was one of the most misunderstood premiers in that he managed to never make a drama out of a crisis. Indeed his tenure covered the golden period from 1992 to 1997 and set up the conditions for ‘Our Tony’ to reap all the benefit over the next 13 years.
Merkel is probably correct in sitting back to await events as Italian 10 year debt is now back below 5%, by quite some way. As this was the trigger point for all the equity market weakness it might seem that traders have taken their eyes off one ball to concentrate on another.
The FTSE 100 has already had a 100 point range this morning after it tried to open down at 4960 only for traders to take one quick look and ask “why are we down here?”
We are seeing buying on almost all fronts from gold to crude oil and back to equities and stock market indices. The lows on Friday proved too much for us to challenge in early action and it is beginning to look as though the mid 4900’s are a dangerous place to be a bear.
There is strong support from 4935 to 4960 which it is difficult to see us challenging today as there are no major economic indicators out of either Europe or the US.
While we might not be expecting a relief rally there is probably no real bad news out there to really do too much damage. As usual this assumes that the US does not come in on a negative frame of mind.
Underlying everything it is still true to say that companies have seldom been in such a strong position both from a current revenue position and from a cash on account perspective.
Resistance for the FTSE 100 is at 5085/95 and then 5125/30 but real bulls might be looking for an attack on the falls of Thursday.
The Dax is probably not in such a sanguine position as the FTSE, given the GDP data out last week, but even here we are struggling to find any sellers. With Merkel’s refusal to join a bailout of the South, the immediate prospect of a multi-year drag on margins seems less likely and so we may see a bit of a base building exercise in the short term.
On the currency side there is actually not much action going on as it is still very difficult to decide which currency should be weak and which should be strong. They all appear to have problems of the same making.
The Euro – Dollar spread betting market continues to oscillate around a mid-point of about $1.43 with various attempts to push above $1.4450 and $1.45 and vice versa below $1.41/1.40 and $1.39. Sad to say but range trading appears to be the play at the moment; unfortunately this has its risks as it is generally the ‘play’ until it isn’t anymore.
Sterling had a concerted attempt to hold above $1.65 at the end of last week but every time we looked like making the break count sellers counterattacked and took us lower.
This is very much in line with the last three years where anything above $1.65 has proved to be a good selling point.
It must be said though that every currency in the world seems to have been mentioned as a depository for flight out of the Dollar except for the Pound. This is odd when you realise that UK debt is now trading at an all time low yield. Investors seem happy to fly to Gilts but not to Sterling.
This said it is impossible to deny that there is massive resistance built up over several years all the way up from $1.4480 to $1.6750 then even more at $1.6900 and finally from $1.7000 to $1.7050. There is good support below at $1.4450/70 then $1.6420/25 but if we do get down here it is probably safe to say that the bull pressure is easing for the time being.
The gold spread trading market has spiked higher this morning but it is difficult to get excited about the yellow metal at the moment.
With every asset class in the world coming under pressure, the flight to quality argument is becoming harder to support. The only argument in its favour is “that there is not much of it about”. However, the same argument could be used for quite a few assets, power production facilities come to mind, but these are all falling in line with everything else.
Our comments have been clear that it has been foolish to stand in the way of the gold bull run as every indicator seems to be pulling it higher. Nevertheless at some point the argument begins to turn for the Longs as well.
The upside is beginning to look less certain the higher we go and the view from our current level shows that there is a long way down to worry about.
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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'Stock Market Indices See Gains After German GDP Inspired Declines' edited by SD, updated 22-Aug-11
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