The FTSE has commenced the week tentatively as investors reflect on four weeks of declines on the trot with the big question being, do the falls for the FTSE and Dax of around 5% and 9% respectively represent a buying opportunity?
Since European indices had recorded the most impressive gains so far up until mid March they are the ones suffering from the correction the most. The FTSE, as mentioned previously in this comment, has bounced neatly off its 200 day moving average at 5560 which is where the support still currently remains, whilst at the same time being at the level that we pretty much commenced the year. The recent bounce of the last few sessions has yet to prove itself though as the 20 and 55 day moving averages crossed themselves earlier in April, and with the same moving averages on the verge of doing the same on the Dax’s daily chart, the bulls continue to look nervous about buying at these levels.
The catalyst for any rise could come from a number of factors, the first being the US earnings season that is now underway and so far has not exactly set off any fireworks, but there have been no major disappointments. The Wall Street banks kicked things off on Friday and this week will be dominated by them as we see Citigroup today followed by Goldman Sachs tomorrow, and Bank of America along with Morgan Stanley on Thursday. JP Morgan beat expectations last Friday showing that Q1 was a bumper quarter for Wall Street banks as they have benefited hugely from the massive liquidity provided by the ECB from their LTRO program which not only saved European banks, but led to a flurry of deals within the capital markets. This however does not necessarily mark a turning point for investment banks as many of them continue to shed jobs in a bid to rein in the costs.
This morning the FTSE is at 5680 at the time of writing just benefiting from that little bit of buyer interest as mentioned above. Near term key levels for the index are seen at 5630, 5570 and 5535 to the downside with 5730, 5750 and 5810 to the upside. Like investors clients have been tentatively buying into the recent weakness but not to the extent that we would normally expect after such a retracement. As a result few are benefiting from this morning’s little bounce.
This week sees lots of economic data to focus on including today’s retail sales from the US. The UK releases its retail sales on Friday but before then unemployment figures on Wednesday will be closely scrutinised.
The euro reversed Thursday’s gains, spurred on by a spike in yields on Spanish and Italian debt, indicating resurgence in the European sovereign debt crisis. Fears are brewing that yields could once again soar as trader’s fear the Spanish government will need to be bailed out. Italy, with its even greater debt burden, is applying even more downside pressure to the single currency. With the mood so negative, traders could soon test the 1.3000 big figure, and this morning EUR/USD is at 1.3015.
USD/JPY has been in a tight range recently despite broad risk-off sentiment which has seen other currencies decline against USD. The pair is likely to continue traversing sideways despite the volatility in other assets and currencies, on the one hand the prospect of further easing from the BoJ is still on the cards weakening the appeal of the yen, whilst clear indications of another European sovereign debt crisis and possible QE3 from the Fed keep it well supported.
Gold prices fell sharply on Friday, spot gold losing $19 to close at $1,652.29 an ounce on Friday as the dollar strengthened due to safe haven in-flows and as traders exited riskier euro holdings due to worries over Spain’s gloomy economic health. Whether or not gold returns as the choice for safe haven flows will be answered as it approaches the support level of $1620. Any break below this level could see the yellow metal retrace significantly.
Crude oil dropped $0.80 on Friday as several negative cues translated into a strengthening dollar. Weak Chinese economic data and fears over the fragility of the euro zone weighed on crude, but also comments from Saudi Arabian Oil Minister Al-Naimi stating that there is "no shortage in global oil supply" and "his country was determined to see lower prices" further added to the selling pressure. This morning Brent is softer again at 119.70.