The news this morning is all about downgrades and IMF/EU debt refusals.
The big one is, no doubt, the Hungarian issue as the IMF and EU have turned down an increase in aid in response to the new government’s austerity package. In reality we can probably deduce that the supra nationals have been searching around for somebody to ‘act’ tough with who will serve as an example without harming the weakened EU banks to any great degree. As a reason to sell the Euro it is therefore not a good one as markets may well take the view that ‘harsh reality’ has been the one missing ingredient in the ‘saving’ of the debt markets engineered over the last two months.
The Irish downgrade has been taken in its stride and the reduction is only a couple of pips below AAA which still means that it is deemed a quality investment grade. Downgrades have been seen to be buying opportunities in recent weeks so traders have been nervy of selling the Euro first thing.
The other fun bit of news was the Easyjet timeliness issue. Ryanair was forced into paying a £50k libel sum to Stelios over some minor point and then the day that Easyjet make a great song and dance with ‘paid for’ advertising to this effect is the same day that their punctuality stats are shown to be worse that Air Zimbabwe (I cannot imagine who delivered this juicy piece of data to the journalists!). The moral of the story seems to be “do not mess with Michael O’Leary”.
Markets are opening pretty much at the levels of Friday’s close after the re-emergence of double-dip recession talk in the US had bashed us back down from the 5300 level. The resistance at 5280/5310 is becoming critical to price progress as we are continually failing, for one reason or another, to make any impact on the barrier. At the other end of the line 5100-5110 is similarly a good support level and with prices currently at 5124-25 we are finding our clients to be heavy buyers in early action looking for this to hold. For those with long term aspirations any prices at current levels look reasonable as returns on equities are well ahead of Cash and Bonds (average yields on the FTSE are above 4pc versus 0.5 to 3.2 for other assets) the problem is that asset values are looking to be under pressure as we concern ourselves with the fear of deflation and a possible return to negative growth. Short term dealers are, as mentioned picking up stock but they will be watching the support levels like hawks, as a breach of 5100 may trigger a bit of a sell off from weak Longs.
The Dow has also fallen back to a good support level (10080) but as with the FTSE could not break through. This has triggered buying here as well and our clients will now be hoping that the jitters of Friday are forgotten through today’s session.
Currency markets are responding to the IMF announcement with strong buying of the Euro and my comment of earlier in this report has rather been overtaken by events. When written the Euro was below 1.2900 but is now up at 1.2960 and looking strong for the session. Markets like certainty (even if the certainty is unpalatable) and the decision to admit that there is a point at which the lenders will not go beyond may well be a seminal one. The Euro has problems that will go on for years and years to come, problems that will bury some of the weaker members, but if the political will is to hold the structure together, come what may, and to make the harder choices that will enable this to be the case then the argument for the demise of the Euro become less over whelming. Yes, the Euro is probably overvalued but not to the extent that will force its capitulation.
Sterling is being pulled around by the Euro but has been falling versus Euroland for some time now. Three weeks ago we were up at 1.2400 but are now struggling down at 1.1815. While the Pound has been gaining ground over the Dollar rallying above 1.5000 to the current 1.5335 this has not been enough to keep pace against the Euro.
Gold fell dramatically through Friday but ran full into the huge support (both as a price level and on the long term rising bull trend line) at 1186 and … stopped. We are now back up at $1192 and clients are buying everything in sight (as they have been for weeks now). Traders must worry that the world and his dog are long of Gold but this has been the case for years now and we are still in a definite bullish trend. Only a breach and close below the aforementioned 1186 price level might be slightly damping on optimism and the rising trend line is now at about 1189 so punters will be keen to see it remain above these two points. On the upside 1196 is minor and 1212/18 more solid resistance.