Strength from the markets a pleasant surprise

10 January 2012  •  Source: Simon Denham, Capital Spreads

The strength from the markets this morning comes as a surprise considering that the rhetoric from European leaders seems to be focusing more on the possibility of a Greek exit from the eurozone. Whilst the drivers behind the new EU treaty maintain that a break up in any shape or form is not a desirable option, they are starting to accept that Greece is a “special case” is becoming more and more likely to leave.

The optimism though is probably coming from the fact that Merkozy are hoping to bring forward the deadlines for agreement on the new treaty and have it all in place by March, along with plans to stimulate growth as their “second pillar” part of the plans. This is all very ambitious and there’s still a huge amount of detail that’s required to be fleshed out such as how a new treaty will be enforceable when one of the EU’s biggest economies and contributors to the EU’s coffers is not taking part.

The hope of focus shifting away from Europe in 2012 has been quashed as investors continue to lot at how various bond auctions and summits go as opposed to the economic data and corporate results which have been surprising to the upside. US investors remain optimistic of a positive year for equities in 2012 and for those statisticians out there the chances of a rally in equities for the year have just been enhanced by the S & P closing higher after the first five days of the year, at least from a historical standpoint. The Dow also continues to hold onto the ground above its 200 day moving average and looks poised to have a go at marking new highs following good numbers from Alcoa, despite being loss making, as the US earnings season gets underway. European markets are being propped up US and Asian markets and one has to think that if it wasn’t for the European sovereign debt crisis the Dow would probably be forging ahead to a new all time high!

The euro strengthened yesterday against the dollar, which could be explained as some profit taking by traders on short positions. However, as stated yesterday, upside for the euro was always going to be short-lived simply because the eurozone debt situation is nowhere near resolved. Investment bank UBS say another reason that the dollar will become stronger against the euro, is because the US will reduce their dependence on oil imports and the faster growth will encourage investors toward dollar assets. The euro is trading down this morning against the dollar at 1.2759, but we are still awaiting some news to come out of Merkel’s meeting with IMF head Christine Lagarde today.

With the prospect of a new recession rife on investors’ minds, the current trading view on the markets seems to be one of short term. This means that any rally witnessed is shortly followed by a bout of profit taking, unfortunately not helping markets gain any ground. Not only this, but outlook on the Greenback is an exciting one with the American economy in better shape, limiting any potential gains in dollar denominated gold. So after a small rally in the morning session, gold retracted in the face of the stronger US dollar, ending the day down 5.4 bucks at 1610.9. Currently, the precious metal sits at 1616.4.

Much like gold, crude was hit by the concerns over another recession and the state of the euro zone economy. The only factor limiting the decline was the tension between Iran and the West as the Middle Eastern country made public a second facility for enriching uranium, while an American citizen was sentenced to death for allegedly spying. At time of writing, there hasn’t been much action and Brent is trading up 40 ticks at 112.87.

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