A bit of profit-taking was the order of the day yesterday, led primarily by US indices, which weakened shortly after opening, as investors of US stocks seem a little tentative to push the S&P back towards levels of around 1200 not seen since the collapse of Lehman Brothers. 1200 in the S&P has also been mooted as a major resistance level, as well as being quite a psychological barrier. As a result, European indices gave up some of their recent gains and we see a continuation of that move this morning, but on the whole we’re still grinding higher.
The main events of today are the European central bank interest rate decisions, with the BOE at noon and the ECB at 12h45. There are unlikely to be any surprises from either central bank, in particular the BOE, who’s expected to remain firmly in reactive mode and await the outcome of the general election before taking any action, which for now would be unnecessary anyway, as the policies currently being undertaking are working. They’ll need to keep a firm eye on inflation going forward though, in order to ensure that it doesn’t get out of control.
Other economic numbers are thin on the ground, but at 13h30 the weekly US jobless numbers are released and shouldn’t be ignored as the four-week average continues to show claims are falling. The forecast is for a further fall, and investors may use a good number as a reason to pick up more equity, in particular the miners.
The euro weakened further on the back of soft European data and there will probably be some volatility during the ECB interest rate decision and resultant statement. Expectations are for slightly more confident language to come from Trichet, as overall confidence and sentiment data in the eurozone has been gradually improving and the Greece situation seems to be contained. This is despite wrangling over what the Greeks must pay for any bailout if it comes, and their deficit having increased. As the cost of their borrowing increases, the likelihood of a default increases, but there are two options open to them to assist in dealing with such an occurrence.
As any rebounds in EUR/USD continue to be short-lived, the bears continue to add to their short positions. The euro is now heavily shorted and sentiment is exceptionally euro-negative, making the possibility of a bear squeeze and sharp correction to the upside all the more likely.
Whilst the dollar is gaining against the likes of the euro and sterling, it continues to suffer against other currencies, in particular the Canadian dollar, where it hit a 21-month low.
This weakening of the dollar against other majors has allowed gold to put on over six percent in the last couple of weeks, as yesterday it had a storming day rallying $18, breaching the 1140-45 resistance and heading over 1150. Profit-taking late last night and this morning though has meant we’re back around 1147. Yesterday’s move could be seen as a mini-break out higher, but for now there’s been no follow-through of the move.
Oil couldn’t quite hold onto its gains and experienced a bit of profit-taking, after the initial flurry of excitement following the weekly inventory numbers that showed a rise in inventories. The case for higher crude prices is strengthening as the economic data improves and so the bulls are still firmly in control, particularly following the breakout to new highs over Easter.