Investors remain heavily focused on Europe as ongoing negotiations to avert a crisis of global proportions continue behind closed doors. The market might be seeing a little renewed buying and return of confidence however banks remain worried as the domino effect seems to be taking place amongst Europe’s banks. Not only is Dexia, one of the biggest banks in Europe requiring a multi-state bailout but a Danish banks and yes, you guessed it, a Greek bank have gone cap in hand to their government. The situation is getting to a danger point now which is why so many people believe the action being coordinated by European politicians at the moment will be too little too late. With the pressure of banks now being piled onto the states and the credit ratings agencies circling the sovereigns, it’s little wonder that overnight deposits at the ECB reached their highest level for 15 months.
Today’s important events include the expected conclusion of the troika’s assessment of Greece’s finances and the Slovakian vote on the expansion of the EFSF. Both outcomes are important parts of the whole European saga as a failure by the Slovakian parliament to pass the vote will delay the EFSF’s expansion plans, but more importantly if the troika concludes that Greece has not done enough to warrant its next tranche of bailout funds, it will default. The reason for delaying next Monday’s EU summit to the following Sunday could be a sign that the troika is willing to allow Greece to default now rather than letting things drag on. If such a default can be contained and Greece’s creditors take the write downs on the chin then contagion might be averted. It is an option at least and no doubt one that’s being discussed.
Despite banks in European being bailed out and the eurozone remaining on a knife edge, the FTSE has risen back to the 5400 level in impressively quick time. However, we seem to be once again at the resistance level that has held up so much in the past. A failure to get above here will be the seventh attempt that the index has tried to overcome the resistance so it’s little wonder that we’ve seen some sellers of the FTSE overnight and this morning. At the time of writing the FTSE is at 5390 having commenced the session a few points lower, so there seems to be a tentative attempt at regaining the 5400 level.
Today’s economic data highlights come in the form of UK industrial and manufacturing production The industrial element is expected to decline, unsurprisingly so given the slow down of things globally and poor domestic demand, however there was at least a slightly better than expected rise in the last PMI survey which might lend support. Manufacturing too might benefit from that PMI data but month on month production is expected to be flat.
Later this evening there’s the FOMC minutes which should provide more detail of operation twist, but also whether there’s been talk of any other possible stimulus packages.
FX markets are broadly flat this morning with the dollar not doing much. It’s weaker against the euro and a little stronger against the pound so not much to write home about. Like equity markets EUR/USD has enjoyed a good rally in recent days but is finding it hard to maintain gains around the 1.3700 level. A few failures there in the past make this the big resistance level for the pair to overcome and with it trading at 1.3665 at the time of writing it’s not far off possibly having a go.
Gold has been creeping higher gradually and is back around 1675. The precious metal has not enjoyed a similar return to the highs that it has in the past following retracements and goes some way to shroud the bulls in doubt about the longevity of gold’s multi-year bull run. The long term upward trend is still very much in tact, however if the bulls can’t retest the all time highs soon, momentum might just run out and we could test the recent lows again.
By Simon Denham CEO, Capital Spreads
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