The failure of the markets to push lower yesterday, coupled with slightly less Armageddon-like statements from many economists, has tempted more players into the markets hoping that the lows of the last few days might prove to be the end of the bear game.

In the early hours of this morning quite the opposite appeared to be the case, with the Far East opening with a sharp shift downwards taking our quote for the FTSE below 4800 and the Dow at one point hitting 9565, a new nine-month low, fortunately most of our clients were fast asleep in bed and so were completely oblivious to the move.  The markets then swung dramatically, with the Nikkei executing a 300 point reversal rally.

As mentioned a few times in very recent comments, the data coming out of the States in recent weeks is poor, but not as poor as the markets seem to be pricing.  At one point last year GDP growth in the US was being marked at well over 5pc as we swung out of recession way ahead of all the other developed nations.  It is hardly surprising that some of the gloss is now coming off those numbers.  The ‘easy’ recovery growth now appears to be over and the numbers we are seeing are more in line with a gradual move towards what will probably be a longer term 2 to 3pc number; unfortunately, not enough to impact employment to a great degree, but steady enough to avoid a downturn.

This morning, virtually every market is in sync with the Dollar falling, Oil rallying and the equity markets surging, pretty much the order it has been for a while now (although sometimes the other way round).

The FTSE is now 70 points up on the day at 4890 and we can expect a bit of resistance if we attempt 4900.  Importantly, the early rally has moved higher than previous day’s highs, which may give heart to battered bulls. With the benefit of hindsight we can now see that the sub 4800 level looks to be solid support or (probably more likely) nobody really wants to sell down there!

As mentioned, the Dow hit 9565 overnight, but is now back at 9720 and the trading action has been quite exciting considering that the US was not actually in.  We often find that US holidays provoke market moves and we can see that the first two weeks of July are often high or low points of recent moves, presumably as traders start to trickle back in after their holidays and take a new view.

The Currency markets are also continuing in their current vein of Dollar weakness, with the Euro challenging the 1.2600 level again after their failure at the same point on Friday.  Currencies had their own follow-me last night as well, and the price action for the Euro and Sterling versus the Greenback is almost identical to the indices.  We have now built solid support at 1.2480 and it would be surprising if we could challenge this in the near-term. Yesterday spent virtually the entire session gripped around 1.2530/45, which may prove irresistibly attractive in the absence of anything else, but the recent rally is not giving up yet and dealers will probably continue to find that the upside is the easier direction due to the number of shorts being pushed out.

Cable is also tagging along for the ride, as the pre election closing price of 1.5090 (mentioned yesterday) held on for support through Monday and last night.  Sterling remains something of an enigma, as much of the recent strength is built on the Tory/Lib pact and the emergency budget.  When the going starts to get tough later this year, and through 2011/12, the Libs may fear that their party will be destroyed on the back of policies they do not believe in and were certainly not voted in on.  At this point, the pact may well start to unravel…a problem for the future, but a problem none the less. As mentioned yesterday, 1.5200 seems to have had an irresistible attraction for the markets over the last 18 months, as no matter how far we fall or rally, we seem to eventually get back here. We are also close to a crucial trend level as well, with the two-year bear trend line now at 1.5350. Bulls will be aiming for this and, if the news remains favourable, a break here may well give the currency a sharp kick higher.  Unfortunately, there is always the other side of the coin, and the economics for the UK are still parlous (especially as most of the solutions are still in the future).  Growth in the UK is fragile and unlikely to be helped much by the Euro zone in the medium-term and we can expect grim numbers to put the occasional fox in the hen house.

Oil drifted down to near to 71 dollars last night, but along with everything else is benefitting in the sun this morning. Crude is now back at 72.50, where we spent most of yesterday morning; it would be surprising if much happened before the US joins in this afternoon, and dealers may wait for the inventory numbers (out on Thursday this week due to the US holiday) before getting too carried away.  There is not much in the way of critical data available until Thursday anyway, so markets will almost certainly continue what ever direction seems easiest.