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Market Comment 18th Sep 2012

The old worries just don’t seem to want to go away as Spanish bond yields creep higher taking them back above 6%. 

At least they are still nowhere near the dizzy and unsustainable heights of 7.5% so no need to start panicking again yet, but it acts as a sharp reminder that if Spain insists on going it alone without a bailout, then the going is by no means going to be easy. 

You can’t blame their Prime Minister Mr Rajoy for remaining stubbornly opposed to a full blown bailout as no politician would wish to impose the sort of austerity that would come attached with such assistance upon their electorate.

When your country is in recession and unemployment is rife further pressure to cut back government spending would simply make things much worse causing any prospect of growth in the near term a long and distant hope. But reforms have to be made as the current spending by the government is simply unsustainable and will become more so if the country’s bond yields continue to rally making the chances of a bailout all the more likely. Social unrest will continue throughout the country and Mr Rajoy’s limited popularity carry on dwindling, as if there was any left! This is just further proof of a politicians’ reluctance to make tough decisions as they are always the most unpopular ones.

Now that the central bank action has happened investors are finding that they have been left to their own devices. The focus is very much back on Europe and when the bond yields of the worrisome countries are spiking again you’re going to see the party fizzle out rapidly.

This morning the FTSE is suffering another bout of profit taking, adding to the 20 point loss yesterday with a 45 point loss today putting the index at 5850 at the time of writing. Having been so close to the 2012 highs only a couple of sessions ago it now looks like rather a tall order to see the index break through the 5950 area and even test 6000 in the near term.

Economic data comes in the form of inflation figures for the UK where the year on year CPI number is expected to fall from 2.6% to 2.5%, but month on month is due to rise. After that there’s the ZEW sentiment from Germany and then from the US this afternoon there’s lots of speeches from members of the Federal Reserve.

The euro closed marginally lower against the greenback and just above the 1.3100 level amid failure by the euro zone finance ministers to agree on the banking sector union. On the other hand stopping for a breather after the last two weeks’ impressive surge could be regarded by the bulls as consolidation before the next rally. This morning the single currency is at 1.3075 and near term support and resistance is seen at 1.0315, 1.2975 and 1.3140, 1.3170 respectively.

Investors started the week in no mood of adding to their long positions but rather moved for taking some cash off the table pushing gold price $8.10 down to $1762.00. QE3 seems to have been largely priced in now so the yellow metal could go back and search for its direction from the US dollar and the equity market.

It is not yet clear if it was a ‘fat finger’ mistake but the fact remains that the WTI crude prices dropped 3 dollars in a minute or so, closing $2.89 down for the day at $96.26. It happened amid only a slight decline in the stock market coupled with a minimal gain in the US dollar. At the same time, the tension in the Middle East between Iran and Israel if anything seems to be on the rise.
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Market Comment 18th Sep 2012

The old worries just don’t seem to want to go away as Spanish bond yields creep higher taking them back above 6%. 

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