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Publication date: 9 January 2012
Author: Simon Denham, Capital Spreads

Traders are ignoring the continued concerns over the eurozone…

Traders are ignoring the continued concerns over the eurozone this morning as the FTSE commences the week on the front foot. A presumptive start to trading as perhaps there’s a degree of optimism that this week’s kick off European meeting between the French and German leaders will be the start of something more meaningful. As the month goes on we see further European meetings and climax with a summit at the end of it. The agenda is shifting slightly towards how to stimulate growth which many see as folly when you consider how the situation remains dangerously close to seeing a break up of some sort. Towards the end of last year the likes of Sarkozy and Merkel were even discussing the possibility of Greece exiting the eurozone and now they seem to be assuming that that’s not going to happen.

Other things on the agenda will be the financial transaction tax which led to our Dave’s infamous rejection of the new European Treaty last month. Even though the majority despise bankers, a vast amount of financial transactions are not just made by banks. A large proportion of the financial services sector makes these sorts of transactions (us included) and the costs are likely to knock growth to such an extent that the taxes reaped from it are lost to reduced GDP and tax revenue elsewhere. Despite this Sarkozy seems hell bent on trying to implement it across the whole of Europe, including the UK even if we do veto it. This will be an interesting battle going forward.

We had been calling the index to open lower this morning by some 25 points but it has actually opened to the upside somewhat surprisingly. At the time of writing the index is at 5565. The index has got off to a mildly positive start for the year and across the pond the Dow has had a comparative January so far. The first few days of January are considered to be a good measure for the remainder of the year and even if things might have been a little shaky last week, we’re up almost 2% which bodes well for equities going into 2012. It indicates that despite the headwinds, there is a degree of risk appetite out there.

The euro is becoming the whipping boy of the financial markets as it hit a 16 month low against the dollar and an 11 year low against the yen. The fact that NFP figures on Friday were better than expected, which generally would increase investors’ risk appetites was followed by weakness in the euro, really tells us where sentiment lies regarding the eurozone. Even if something positive is announced following the meeting between Sarkozy and Merkel in Berlin today, we would expect this to be limited to the very short term and simply signify a bear market squeeze. Currently the euro is having a strong push, up at 1.2755 against the dollar.

The better than expected US jobs figures on Friday meant that demand as a safety net for gold was thin as investors risk appetite returned. Not only this but a strong US dollar and possibly a bit of pre-weekend profit taking caused the precious metal to finish down 4.8 bucks at 1618.0 after reaching an intraday high of 1631.1 earlier in the session. Traders have seen the yellow brick rally from as low as 1522.4 since December 29th and the technicals show that this boost isn’t yet over, with a short and long term bullish trend. Currently, gold is trading up on the day at 1620.1.

Crude was given a leg up after the US labour market data was released on Friday, pointing towards a high demand for black gold in the coming months. However, the advance was capped by a strengthening greenback and slumping equity markets, along with the after-thought on the bearish inventories report released the previous day. At time of writing, the black stuff trades at 113.47.

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