Have investors got a little ahead of themselves

4 January 2012  •  Source: Simon Denham, Capital Spreads

The rally that markets have enjoyed so far this year looks to have come to an end as investors look like they might have just got a little ahead of themselves. The calls on the open are to see a mild decline for the FTSE and its European counterparts as a little bit of weakness crept in overnight in Asia. You can’t expect markets to continue going up in a straight line forever and the start so far to 2012 might have been a little too bullish for some people.

Today people will be focusing on a German bond auction with hopes that it’ll go smoothly and the yields demanded by investors will not exceed those of the UK which they did briefly and a recent one last year. With lots of bond auctions going ahead into the New Year this will be one of the themes going forward and investors will be keeping a close eye on this side of things. As well as all the debt that needs to be refinanced by European countries there’s more summits and meetings between European leaders, although for now there’s been little focus on the next one so far this year and it comes after a certain degree of time. This could be seen as a good thing for many as the markets seem to be settling and there’s no summit to worry about for now.

US markets have continued to storm ahead with the Dow showing particular strength. The index is well above its 200 day moving average and whilst many people still claim this move higher is part of a broader bear market rally, few are betting against losses for US equities which are proving much more resilient than European indices. Yesterday’s move by the FTSE brought it back above its 200 day moving average, whereas the German Dax still languishes some 300 points below its. These remain testing times for equity investors where the bulls continue to claim that there’s plenty of value out there to be had and for people that remain hungry for returns and yield then stocks do remain an attractive asset.

A bit of economic data today from Europe and mortgage approvals from the UK are expected to show continued low levels. The highlight of the day from a data standpoint though is the prelude to Friday’s non-farm payroll as the ADP private payrolls are released. There are clear signs that employment in the US is accelerating as the weekly initial jobless numbers have been ticking lower and lots of the other economic surveys have been better than expected, so today’s number is due to show another healthy increase in jobs created by some 170k.

The risk on trade yesterday took EUR/USD back above the 1.3000 level where it remains so far this morning. Trading at 1.3070 at the time of writing the move higher so far this year shows that the contrarians are in control as sentiment towards the single currency at the end of 2011 was so dire that many traders see that as the time to buy. Near term support and resistance levels are seen at 1.3000, 1.2920 and 1.3085, 1.3120 respectively and no that the bulls have dragged the euro back above the 1.3000 level they seem to have the wind behind their backs.

Gold also has the wind in its sails as it returned back above the 1600 level yesterday. Still below its 200 day moving average which sits at 1630 this is the next target for the bulls but there could be quite a bit of resistance here. The precious metal is trading at 1616 this morning so other key levels to watch are 1590/80/60 to the downside and 1621/30 to the upside.

Crude had a big jump higher too yesterday taking Brent back above $112 as geopolitical tensions between the US and Iran increased as the Middle Eastern country stepped up its threats to block oil shipping through the Straits of Hormuz. This morning Brent remains above $112 at 112.30 so support and resistance is seen at 109.55/107.60 and 112.80/113.85 respectively. Considering that the downward channel remains intact there might be limited upside, but further strength can’t be ruled out if tensions continue to mount.

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