Stock market strength is taking hold as investors dip back into equities following their three month decline since April.  Now with the FTSE firmly back above the 5000 level and the Dow closing above the 10000 level once again the big figures seem to be offering support and attracting buying interest.

Yesterday’s strength was assisted by some good news on Wall Street which starts to get into the swing of the earnings season as State Street Corp released good numbers, driving banking stocks higher.  The rally was barely assisted though by the global growth story stocks such as miners who arrived late to the party edging higher slightly only after other stocks led the charge.

The real test for markets now is whether they can sustain these gains.  At the moment there’s a concern for the bulls that lower lows and lower highs are being formed indicating that this down trend is set to continue.  There will certainly be some pressure to the upside for the FTSE 100 now as the recent rises have brought us back to the 20 and 50 day moving averages where resistance can normally be expected.

The theme of the moment is European bank stress tests and for all the criticism they’re getting the market still remembers the US stress tests that were undertaken 15 months ago which were thorough enough to allay many people’s concerns that US banks at least would be able to withstand another shock to the financial system.  This time round it’s the turn of the European banks, some 90-odd of them, to undergo a similar testing regime to see if they can survive another recession or shock (if it was to materialise), how that might affect other banks and most importantly what would happen to the flow of credit.  This is the big question and if credit markets freeze up like they did back in 2007, we could be in a serious pickle.

Things are slightly different now though to how they were three years ago.  Banks are being forced to hold more capital and some of the really big banks are being propped up by national governments, so it’s hard to see the stress test results revealing much more than what we would all hope they’d reveal.

Banks are also in the headlines for other reasons and once again it’s the EU’s plan to “reform” the way bonuses are paid.  There’s definitely good reason to look carefully at remuneration for the deal makers within the banking and hedge fund industry and many who work in it would agree, but the emphasis being on capping and deferring bonus payments will only lead to bankers leaving these jurisdictions to work elsewhere.  Politicians saying “good riddance” if there’s an exodus of bankers doesn’t help either.

So the FTSE is forging ahead and today sees interest rate decisions from the BOE and ECB.  Once again we’re expecting “unch, means early lunch” with the market focusing on the statements following the decisions.  There are any expectations for rising interest rates this year and so there shouldn’t be.  With many economies so brittle at the moment raising the cost of capital now, ahead of big spending cuts, would be completely the wrong decision.

FX markets are rather quiet this morning although the Aussie dollar is having a good day up over a cent against the dollar.  AUD/USD is reaching resistance levels that it failed at back in mid June with the driving force being the renewed strength in equities.  A move beyond 0.8850 could open the way for 0.9000 but a failure around here could give bears the upper hand again as a lower high is formed.

Gold has found support below the 1200 level and so we’re back above that level this morning. For now the profit takers are still in control and unless we see a move above 1215 we might see a return to the 1185 area.

Similar can be said for oil which has bounce once again from just above the $70 area and for those playing the 70-80/85 range, this trade is proving quite an easy one to follow.

Last Updated: July 8th, 2010