Markets are a little undecided this morning, after weakness in the US has brought the infamous 10,000 level in the Dow back into focus. Indices have been under the cosh this week, with the FTSE down around 3% and the Dow around 2.5% worse off than it was on Monday. Investors have been a bit of a reality check after a good bounce from the lows of May and June. Things were starting to perk up for equities, with many breaching near-term resistance levels, however the gains haven’t been sustained as fears that austerity packages across Europe, stricter banking regulations and higher taxes, will ultimately lead to anaemic growth or even the dreaded double-dip (as already experienced by Finland).
Investors will be looking ahead to the Toronto summit of G20 finance ministers and G8 leaders this weekend, where once again they will thrash out plans for banking regulations. More and more the plans seem to be watered down, much to the relief of the markets, but most importantly due to pressure from countries that haven’t really suffered from the credit crisis like Canada and many South American nations. Their banks have largely avoided the fallout, so of course they are heavily against a new one-size-fits-all rulebook.
There’s a real battle between the inflation and deflation camp, with inflation remaining high in the euro zone and UK as currency depreciation contributes to higher prices, but the deflationists see that the deep cuts being inflicted on European economies will send unemployment soaring and prices tumbling. This is the big fear facing equity markets at the moment and it’s conceivable that we will just drift sideways in the coming summer months.
On the economic data-front, the only focus today is the University of Michigan sentiment out in the US at 14h55 London time. The reading is expected to come in flat at 75.5, but I wouldn’t be surprised to see a weaker number than this following the sell-off in equities and doom and gloom mongering from George Soros.
So the FTSE is just in the black this morning having been in the red earlier. Clients have been buying into this decline in the FTSE and are long the S & P too. If we head lower, they’ll probably continue to go against the trend, but you can’t blame the bulls from coming out as we’ve seen the 5000 area hold up in the past.
The euro has remained remarkably resilient in the face of the very negative comments from Soros this week (I wonder what position he holds on the euro!). Even though the RSI has been indicating over bought for a few days now, EUR/USD continues to hold its own. At 1.2330 this morning resistance is .12410 and then 1.2465 with support at 1.2260 and 1.2210 in the short-term. Over the more medium-term 1.2650 and 1.3000 are major resistance and do look to be quite a challenge with support at 1.1750. The trend is still firmly downwards, but there’s some support at least for the single currency.
The recent strength in EUR/USD and cable has more been down to dollar weakness, which has felt the brunt of the selling in line with the equity market over global economy concerns. It’s a strange move as the dollar has benefited so much in recent months as being seen as a safe haven, but recently that sentiment has completely reversed and it’s the turn of other currencies to strengthen, in particular the Yen.
Gold’s failure to sustain the highs has brought it back down to the 1245 area, and it looks to be well supported by the 20-day moving average. Clients remain long and continue to reap the rewards of this raging bull market.
Oil has had a little correction to the downside along with equities this week, but bounced off $75 yesterday, so it too seems well supported. At 76.50 this morning, technical analysts will be interested to see that the 20- and 50-day moving averages are crossing as I write, which usually indicates the next bull phase is under way.