Despite the lack of any political settlement over the weekend, the markets are bouncing aggressively this morning following the fat finger trade last week that led to a huge fall in global markets. Indices are now rushing to get back to their levels of a week ago and the buying is being compounded by bulls adding to long positions and picking up more stock.
This morning’s move commenced in Asian when equity markets opened up for the weekend and reacted well to the EU’s bailout plan. The Euro zone has thrown the kitchen sink at the problem now, with the ECB also changing its rules once again allowing it to buy government assets. Investor sentiment towards the EU has shifted significantly as the deal will go towards financing European debt for the next six months, really helping to minimise the risk of contagion.
The move will of course be funded in the main by the likes of Germany and France, whilst the troubled members get their houses in order. The main cost will be to growth in the coming years as the austerity packages still need to be implemented throughout the PIIGS countries.
The main beneficiary of the morning has of course been the euro, which is up 2.5% back above the 1.3000 level after a few days of aggressive selling last week when it looked like there was little to stop the EUR/USD heading back to parity! A lot of the move can be down to short covering as the pair is so heavily sold, so some bears will have been caught out by the move higher.
UK politicians have been let off the hook this morning after not being able to garner a deal as expectations were for some form of agreement on a coalition to have been made by last night, but the situation has been shrouded by David Cameron’s little brother having a chat with Gordon Brown yesterday afternoon. Whilst a Lab/Lib-Dem team up is highly unlikely, Gordon Brown continues to limp along in a desperate attempt to remain our Prime Minister, but hour by hour pressure on him to resign becomes even greater.
Expectations were for a sterling sell off this morning, but markets are stabilising on the back of the euro bailout and so cable is flirting with the 1.5000 level again, although it’s unsurprisingly suffering against the euro.
The FTSE is back above 5300, with almost every stock gaining apart from BP whose failed attempt at capping the oil leak over the week end has caused weakness in its share price.
The Bank of England’s interest rate decision takes place at midday today. after being postponed from last Thursday due to the election. With the resultant hung parliament, changes to monetary policy are highly unlikely especially since the chances of an emergency budget are increasing with a possible Tory/Lib-Dem coalition, so the Bank won’t want to do anything major before then.
Gold is suffering amid the buying frenzy of risky assets. The safe haven precious metal has enjoyed a tremendous run back above the 1200 mark, but at these levels there are few buyers to sustain these levels and profit takers have driven the price back down to the 1190 area.
Along with equity markets crude prices are also enjoying a rally after having had a good old shake out of the bulls and reaching $75 at the end of last week. This morning Nymex is back above $78, what now seems a long way off the dizzy heights of $86.