In an encouraging sign, US markets made a last-ditch recovery from their session lows to close trade higher, led by a late surge in technology and consumer discretionary names.
After spending nearly 90% of the session in the red and being down as much as 184 points, the Dow Jones Industrial Average rallied to finish 0.1% firmer. The broad-based S&P 500 added 0.1% too, while the tech-heavy NASDAQ was the top performer, rising 0.3%.
The magnitude of this reversal is very encouraging, especially for the euro given the amount of negativity and concern surrounding the eurozone. A number of M&A deals announced overnight also bolstered confidence in the underlying economic recovery.
The recent CFTC traders report showed that for the third-straight week, record amounts of traders held short positions in the euro. Whilst positive information could create a big short squeeze in the near-term, it shows just how bearish currency traders are on the eurozone right now. Demand for US dollars and US-based assets is extremely high - US treasury data purchasing of US bonds and equities totalled $140.5 billion compared to $47.1 billion in the previous month. The demand to position portfolios defensively has picked up dramatically in recent times, with Russia the latest to announce that their euro reserves have fallen to 43.8% from 47.5%. The European finance minister meeting in Brussels will no doubt focus on how the market has responded to the bailout and could be a catalyst for a reduction in euro short positions, which in turn could be positive for European equities.
In Asia, regional markets are mixed this Tuesday despite the late US rally and a mildly positive open. Markets seem to be lacking direction ahead of tonight’s EU finance minister meeting to thrash out the unresolved issues regarding the bailout fund. As at 06:15, the Hang Seng is the top performer, up 0.4%. On the downside, the Shanghai Composite is down 0.8% and the Nikkei down 0.2%.
Looking ahead to the day’s trade and the afternoon rally on Wall Street should be sufficient to give European markets some upside as Tuesday’s session gets underway, but fears of debt problems in Europe simply refuse to die, hitting global confidence in stocks and the value of the euro as traders continue to push into the classic safe haven of gold. There are some suggestions however that the extent of the long positions on gold and also the size of the shorts on the common currency are paving the way for a reversion in the near-term, but unless we see some change in the underlying market sentiments, any respite is likely to prove short-lived.
After yesterday’s quiet day of economic data, today sees the release of UK inflation numbers, the German ZEW survey and US PPI data, all of which will help offer an idea as to whether the market deserves to see any further confidence right now. Earnings news is also set to pick up with Vodafone, Yell and British Land amongst the higher profile names reporting in London, whilst in the US retailers continue to dominate with Home Depot and Wal-Mart having the potential to direct sentiment ahead of Wall Street opening.
Ahead of the European open however we’re calling the FTSE up 17 at 5280, the DAX up 38 at 6105 and the CAC up 22 at 3566.
