Investors are in a state of flux as they pause for thought with equity earnings remaining attractive but underlying concerns remain regarding the outlook for the debt ridden Western economies. Here in the UK the tough decisions will continue to be delayed until after a General Election and the worst case scenario is that it produces a hung parliament which will mean nothing is achieved. Both parties are scrabbling for the votes while the market sits and waits to see what the eventual outcome will be.
In the US Obama has also pandered to the electorate by focusing on unemployment as opposed to tackling the real problem of their massive public debt. If the stimulus is extended then this simply postpones the need for tough action and increases the potential for a dip back into recession once we come off the drugs. For the medium term little has been announced to reign in the spending and tackle the deficit.
The market remains undecided as to whether to add to the gains made yesterday or whether the bounce was of the “dead cat” variety. Any attempt to sustain the bounce off the 5150 level has been hampered by BP whose stock has been whacked after reporting Q4 earning below expectations.
A surprise decision by the Australian Central Bank to keep interest rates on hold allowed Asian markets to recover from their lows and has caused some exciting moves in the Aussie dollar.
Also this morning we’ve seen decent retail sales from Germany and a good UK PMI construction number which compliments yesterdays better than expected manufacturing data. UK manufacturing and construction has enjoyed somewhat of a turn around, albeit from a very low base, primarily courtesy of a weaker pound. The construction number this morning shows that activity slowed the least for almost 2 years and comes as another little ray of hope for the economy.
Economic data comes thick and fast for the remainder of the week and the important numbers to focus on are UK PMI services tomorrow, the BOE rate decision on Thursday and then the climax of US non-farm payrolls.
As mentioned the surprise decision from the Aussie Central Bank to keep interest rates on hold has led to a sharp sell off in AUD/USD. The rate shed 1% in just a few minutes following the decision and since hasn’t recovered, sitting around 0.8800. It shows that the Aus Central Bank has become a little more cautious earlier than expected and the decision caught the market off guard. Australia boasts an economy that most Western countries would die for with unemployment falling and consumer confidence rising, so their caution comes as come surprise.
Other currencies remain mixed this morning and as a result gold is flat after a continuation of its strong rally yesterday. Resistance for the precious metal is nearby around 1115.0 as it approached the 20 and 50 moving average, so further gains might be hard to come by. For the downside however 1075 is strong support and chartists will be interested to see the double bottom that looks to have formed around there.
Brent bounced off the $71 mark for the second time since December but is still someway off testing the resistance of its 20 and 50 moving average currently sitting at around $76.