All those clients who’ve been continually buying the FTSE throughout the recent bout of weakness will be breathing a sigh of relief this morning following yesterday’s small bounce and a continuation of the strength today. 

In the past few weeks we’ve seen any rallies snuffled out as the eurozone crisis has been escalating but since the G8 summit last week end a little shift in sentiment is attracting bargain hunters out to play.

Just how far the bargain hunters can push the index higher again is anyone’s guess, but with tomorrow’s EU summit expected to see further rhetoric from European leaders that they want to see Greece remain in the eurozone, confidence could improve further in the run up to the next election in the middle of June.  Another topical subject that’s expected to be discussed tomorrow is the possibility of a Eurobond in some shape or form which has been discussed on many an occasion but not been introduced because of Germany’s reluctance, as they know they are going to have to be the ultimate guarantor.  But judging by the EU’s handling of the crisis so far and its inability to halt the contagion, if any sort of Eurobond is agreed and created, it will most likely be a half baked one that simply tinkers at the edges as opposed to being any sort of big bazooka.

This morning’s rally shows that investors are hopeful of something to come out of tomorrow’s summit and the FTSE is trading at 5355 at the time of writing up 50 odd points.  All eyes remain on the macro situation and bulls will be hoping this strength can be maintained whilst bears will be expecting it not to last very long.  These sorts of bounces in a prolonged down trend can last for a while, but in order to persuade investors that the worst is over the FTSE needs to get back above resistance levels that have served previously as support.  These are seen around 5575 and 5750 so the index has some way to go.  If we do get back towards these levels it will probably coincide with the Greece elections which will be a real test of the bulls’ mettle.

Economic data comes in the form of UK inflation numbers this morning which are expected to rise month on month but fall year on year.  Even with the lack of growth in the UK economy inflation is being propped up by high oil prices and the BOE’s QE program.  Despite the recent correction in crude, record petrol prices don’t seem to have retraced from their highs and it still costs an arm and a leg to fill up the car.  High inflation has been the bane of the UK consumer’s life for the last few years as people have seen their real disposable income falling.  It’s little wonder that Marks and Spencer has seen such a huge drop in sales for the last year.

Although political uncertainty in Greece remains a risk to the euro zone, the fact that at the G8 meeting over the weekend the European leaders began debating about the issuance of Eurobonds was definitely a plus.  Consequently, the euro continued to recover against the US dollar, moving up 54 pips to 1.2807 but many still doubt that possibility especially when Germany, Europe’s biggest economy, does not entertain the idea.

Gold closed marginally lower yesterday at $1592.20 as investors struggled to find a reason to buy the precious metal as an alternative.  At the G8 meeting over the weekend, world leaders failed to deliver a meaningful conclusion despite expressing their support for Greece.  Although longer term gold seems to remain a good hedge, on the short term the picture looks a bit more unpredictable.

A rally in equities was the driver behind yesterday’s rise in WTI crude prices which in turn was spurred by a Chinese commitment to boost economic growth.  A weaker greenback also played its part in pushing oil prices $1.30 higher to $92.57.  However, the trend remains firmly bearish as indicated by the chart. Investors will be watching closely the US weekly inventories for any indication of a change in the oversupply.

This comment is from Capital Spreads.

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