Markets continue to squeeze higher as dealers run out of things to worry about. The woes for BP have been really holding back the FTSE as the drop of 300 pence in the stock equates to almost 220 points of the Index and the effect of this (plus weakness in the banking sector) can be clearly seen in the Dax/FTSE spread which has widened from 480 on the day of the leak to the current value of 950.
Common sense would seem to tell us that BP’s price reduction is too far and too fast as the clean up costs cannot possibly equate to the loss in equity value but the problem, in the back of everyone’s minds, is the memory that most people thought the same thing when the major Banks were on the way down back in 2008. Clients bought and bought and bought RBS, Barclays, Northern Bock and Bradford and Bingley in the belief that things could not be as bad as the stock price was indicating. The news that the US government may take over claims processing may well push the company over the brink as there would be no real interest in limiting payments and/or investigating fraudulent claims. The fear would be that BP would be swamped with demands over which it had no control effectively handing the company to the US government.
The FTSE is called to open at around the 5260 level in early action after the US rallied strongly in the afternoon/evening session. The Dow has now managed to close above 10250/10300 which was the resistance area holding back previous attempts to the upside. While we are now in open ground traders are unlikely to get too excited just for the moment as there are a series of problems still on the back burner. We are still unsure of the robustness of the current growth spurt in the US as many fear that it is being bolstered by the continued influx of ultra cheap federal money. The ‘25 thousand dollar’ question is what happens when the tap is turned off and the plug is pulled as well.
Markets are still moving very much in tandem with weakness in the dollar seemingly going hand in hand with every other asset class rallying out of sight. In the absence of any further bad news out of Europe the Euro bears are being squeezed and we are now back to the 1.2350/1.2450 support level which was the original target for the bears when it was falling out of bed.
1.2330/1.2430 was the low range support that continually held out between Oct 08 and Mar 09 in the midst of the financial crisis. If the cross can manage to break above here then the long term arguments for continued weakness may start to lose some of their power.
Sterling also continues to benefit from the turnaround in prospects though against the Euro it seems to have run out of a bit of puff for the moment. The move from March at 1.1000 up to the highs last week of 1.2175 has not been without its problems especially around election time and throughout May when it shot backwards and forwards like a mad thing but overall sterling has steadily made up ground. The pull back from last weeks highs has put an end to sterling’s run for now, but it looks to be well supported above the 1.2000 level.
Sterling traders seem to be happy to wait for next week’s budget before committing heavily to new positions so most sterling crosses might trend sideways until then, in a similar fashion to how they have in the past few days.
Gold benefited from the equity rally yesterday and is back around 1235, but it continues to hover below 1250 with momentum just fading at each rally. Crude also had a good day, boosted by the Dow’s 200 point gain as the risk trade re-emerged and we’re firmly back above $76 and the 20 day moving average, even testing resistance at the 50 day moving average, so sellers might keep gains in check, but bulls will be hoping for a close above $76.30.