Markets have been reluctant to give up gains and so are testing their recent highs again, with earnings being the main driving force behind this morning’s rally.  This week has all been about banking stocks who have reported some fantastic numbers, although Barclay’s this morning have disappointed somewhat with poor numbers from the investment banking arm.  They are the biggest faller this morning and go to show that banks are still not immune to poor results, particularly if they rely heavily on the investment side of things.

Their weakness though has not affected other bank stocks and Lloyds in particular is out shining the rest of the pack.  Up another 4% today the shares are now at their highest level for 18 months and thus far in 2010 their share price has gained a massive 54%.

We have long commented on how the banking sector is crucial to the revival of the economy and the recent stress tests and banking results are evidence that the banking system is stabilising.  But to ensure that banks can do what the politicians are asking of them and increasing their lending, the economy and jobs market will have to remain strong and credit markets liquid.  If growth does maintain its current levels then banking revenues should be sustainable and before long investors may even start to see a return of yield from these stocks as well as capital gains.

The Bank of England has just announced unsurprisingly that interest rates are to remain a 0.5% and their asset buying program will also stay unchanged at £200b.  No doubt the usual dissenter Andrew Sentence voted for a rate hike, but he’s still some way off persuading others to side with his view.  Whilst the others sympathise that inflation is much higher than the BOE’s target and it’s their remit to act in bringing it back down, the greater threat is snuffling the recovery by hiking rates.  Andrew Sentence will have more weight to his argument following the most recent surprisingly strong GDP numbers.

It will be interesting to see whether anyone has joined the hike camp when the minutes are released on 18th August, although it’s unlikely.  The majority still believe it’s far too early to hike rates and with King recently saying that the accelerator foot needs to be kept on the floor, rates look set to stay at these record lows well into 2011.  In this way the Bank is continuing to play a “wait and see” game (when has a Central Bank not done this!) so that should the “winter of austerity” send growth tumbling, they can respond with further money printing.

The FTSE is above 5400 at the moment and a close above here will be encouraging for bulls, but there is still major resistance at the 200 day moving average and the longer we take to push on higher, the more likely momentum will fizzle out and the bulls will give up the ghost.

Currencies have been volatile this morning with cable in particular see-sawing above and below the 1.5900 level.  1.6000 looks a bridge too far for GBP/USD at the moment and the move against the dollar in recent weeks has been so pronounced that there’s a risk of a snap back in many of the dollar cross rates.

The USD/CAD in particular has broken to the downside, assisted by the continued strength in equity markets, so technical analysts are expecting even further weakness.  But sharp moves like this are susceptible to snap reversals, especially when sentiment towards any one currency is so negative.  You just have to look at EUR/USD for a perfect example.

Gold is only a little weaker this morning, finding it hard to get back above the 1200 level.  It’s swift recovery from last weeks correction has caught a few people by surprise and the precious metal is finding resistance below the lower upward trend line that it breached back in mid July.  Interestingly, it neatly bounced off it’s 200 day moving average, so bulls will be confident the overall trend is still upward and any news that stimulus is going to be maintained will support the price of gold.