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Market Comment 12th Sep 2012

Today sees one of the major risk events take place with the German constitutional court ruling due to announce that the ESM is in fact legal and the euro project can continue on its way. 

German investors seem to think that the decision is a done deal as the country’s benchmark index has seen considerable strength in the past couple of days and even this morning we have been calling the index to open higher by some 30 points. For German law makers it is a question of if they believe the decision as to whether the ESM is legal or not over is more important than potentially sending the euro crisis into its next phase of uncertainty. Considering that German politicians gave their approval a while ago and we have come a long way since then with the ECB announcing its latest plans to help prevent a euro break up via its so called OMT, today should be little more than a formality.

Across the pond as well US investors continue to push equities to new highs not seen since for almost five years as they set their eyes on the record highs for the Dow from back in October 2007. The bullishness was assisted by better than expected trade balance figures but for US investors it’s the prospect of more stimulus from the Fed tomorrow that is getting them excited and we have seen the expectations for such action built up in the price of gold and silver which tend to be direct beneficiaries of any announcements on more money printing.

But as well as today’s court ruling and tomorrow’s FOMC there are other things to keep investors on their toes. Dutch voters go to the polls in a bid to try and form another government which they’ve been without for a few months now as they attempt to balance their books.

In the UK there’s the unemployment figures due this morning which have been surprisingly resilient of late as the last couple of months has seen the number of unemployed actually fall. Today is expected to see a small rise in the number of job seekers, whilst the overall rate of unemployment is due to stay the same at 8%. As yet the fallout from the 2008 recession has not led to unemployment rising as much as it did in the early nineties, but there are quite a few that feel we could still yet hit the big 3 million mark, especially since the government job cuts are still underway.

The FTSE is a few points in the red this morning at 5780 as it continues to tread water. Clients remain sceptical and hold a largely bearish view, in particular when it comes to US indices as they carry on in their march higher. With lots expected today and tomorrow holding short positions would seem brave but perhaps clients are of the view that it’s better to “sell the fact” since possibly a lot of the hype has been priced in.

Ahead of Germany’s Constitutional Court ruling on the euro zone’s bailout fund, the euro jumped 95 pips to 1.2851 as investors appeared more confident about a solution to the European debt struggles. However, with the ECB already announcing plans to buy unlimited bonds the markets also expect the Fed to do its fair share and at least hint QE3. Assuming Germany gives the green light, any reluctance from the Fed could bring trouble.

Gold is perceived as a hedge not only against fear of inflation but also a good buy in times of troubles and uncertainty. Ahead of crucial decisions on both sides of the Atlantic the precious metal proved that yesterday, gaining $5.5 to $1731 and remaining close to the recent high. A lower US dollar definitely helped as the two have an inverse correlation.

OPEC maintained its oil demand outlook for the current year although conceding to a downside risk for the global economy. That supported the rally in WTI crude prices which rose 88 cents to $97.17 yesterday. At the same time the energy sector looks set to stay ahead of the game in continuing to price in QE3 which should bring along higher demand for oil.

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Market Comment 12th Sep 2012

Today sees one of the major risk events take place with the German constitutional court ruling due to announce that the ESM is in fact legal and the euro project can continue on its way. 

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