The FTSE staged an impressive gain yesterday all things considered after Spanish bond yields rallied to their highest level showing how bond investors as a minimum are unconvinced that last week end’s bailout will be enough to prevent the contagion from spreading. 

But what it does indicate is that there are still plenty of bulls out there who believe that if you put to one side all the negativity equities still represent a worthwhile investment.  Certainly, the extent of the sell off we’ve seen since April has been enough to get any investor interested in dipping their toes back into the market and those buying at these levels are betting that if contagion is averted then we could quickly see a rally back towards the highs of the year.  Other bulls are betting on the prospect of further stimulus and QE from central banks which is becoming all the more likely as growth around the globe is slowing down.

But as mentioned before in this comment past experience doesn’t seem to have acted as much of a lesson to politicians and central bankers as all this serves to do is push the problems deeper into the future.  Yes we may see a boost to growth over the short term, but at the same time such action will probably push commodity prices causing inflation to spike again.  The western world looks like it is slowly going down the same route as Japan but at least if we are in the midst of a “lost decade” at least we’re nearly halfway through it!

Yesterday the Dow Jones reversed course and moved up 160 points to 12,573 on the back of speculation the Federal Reserve will take measures to boost economic growth.  Additionally, a Fed official expressed his support for plans to speed up job creation.  Last but not least, the European Central Bank backed a plan to guarantee bank deposits in yet another effort to solve the debt crisis.  This optimism has filtered through to early trade in Europe with the FTSE ticking higher on the open knocking on the door of 5500.  In the near term 5550 remains the major resistance level for the bulls to overcome.

Economic data today comes in the form of industrial production from the EU, expected to fall, no surprises there, then at lunchtime we get producer prices and retail sales from across the pond, both also expected to decline.  But really the focus remains on the eurozone in particular the fast approaching Greek election this week end.

We saw a sigh of relief as the European Central Bank backed a proposal to guarantee bank deposits sending the euro 39 pips higher against the dollar to 1.2504.  Earlier in the day, the credit rating agency Fitch announced its forecast that Spain will miss its budget deficit which pushed the yields closer to 7% danger zone.  This morning EUR/USD seems to be taking a respite trading at 1.2515.

A hint from one of the Fed officials that more stimulus could be used to boost the economy was enough to spur renewed demand for alternative assets.  As a result, investors turned to gold pushing its prices $12.87 up to $1609.04.  A lower greenback also made the precious metal look cheaper attracting buyers back into the market.

A weaker US dollar combined with a rebound in the equity markets helped the WTI crude prices regain $2.14 to $83.32 yesterday.  However, the energy investors are likely to stay nervous as Saudi Arabia is expected to vote for keeping the same quota at the OPEC meeting in Vienna despite oil supplies outstripping demand.  Maybe the US weekly inventories out later today will provide a few extra clues on the subject.

This comment is from Capital Spreads.

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