Market Comment 21st Dec 2011

Maybe Father Christmas is going to deliver for equity investors after all following a strong rally in US markets yesterday on the back of – not very much in all honesty. 

This is why the markets are so difficult to predict at the moment, when things on a macro level look really dire few would expect investors to jump into stocks and expose themselves to risk.  Despite all that’s going on in the overall economy and the prospect of a recession in Europe next year, this doesn’t necessarily mean that you should sell equities now.  Indices are forward looking barometers and they look beyond any potential recession in Europe or the UK next year. Even if it comes later than expected it is unlikely to be an especially deep one, unless of course we see a worst case scenario of a complete European break up.

There are other worst case scenarios of course including the possibility of a recession across the pond in the world’s biggest economy.  However, there you can expect the Federal Reserve to do everything in its power to avoid such a scenario because their greatest fear remains deflation and with inflation expected to drop off a cliff next year, the deflation threat suddenly becomes a reality again just as it did in 2008/09.

The final worst case scenario is China and its booming economy.  If there was to be a dramatic slowdown in growth there then the knock on effect for global growth will be significant and cause many others to head towards a recession.

Despite the bullish tone to early trade this morning we have seen that the UK is not such a safe haven after all following a warning from Moody’s that our treasured triple A rating is under threat.  A few times in this comment we have mentioned that the UK is not immune to such scrutiny, like our European friends have been in the past few months and this shot across the bows may not be a friendly one.  A downgrade to our credit rating is something that the Coalition has been fighting so hard to avoid, but the reality is that we are borrowing more now than had been expected and growth is simply flat lining.  It comes as little surprise that the Gfk consumer confidence data that came out in the UK earlier this morning did not paint a very pretty picture.

The calls this morning for the FTSE are seeing indices in Europe adding to the gains they made yesterday and the move higher saw a break out to the upside of the downward channel.  The German Dax in particular enjoyed a good boost from some impressive economic data and then the US bowled in with some good housing figures and so there’s a belief that the Christmas rally may indeed be underway.  At the time of writing the FTSE is another 40 points to the good at 5460 having been called even higher just before the open. Bulls will be focusing on the near term resistance levels seen at 5500, 5550 and then 5600. To the downside support is seen at 5360 and 5320.

The risk appetite that seems to have built up in the past 24 hours has rubbed off well on the single currency.  The euro made decent gains against the greenback yesterday and it looks like the 1.3000 level is a very strong support level.  This morning we’re higher again as EUR/USD trades at 1.3165 at the time of writing.  This area was considered to be a bit of a near term resistance so now the bulls will be expecting a move to test the 1.3235 area.

Sterling will be in focus this morning with the release of the Bank of England’s minutes. Sterling has enjoyed some good strength against the single currency in the past few weeks but GBP/EUR can’t quite make it beyond the 1.2000 level.  Moody’s announcement has just put further sterling advances in check but further risk appetite could support GBP, in particular against the dollar.  At the time of writing GBP/EUR is at 1.1970.

Gold has seen a renewed interest as it made strong gains yesterday and is firmly back above 1600 trading at 1630 this morning.  The bulls seem to be back in town and any increase in the risk appetite that has built up recently could add further strength to the precious metal.

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Market Comment 21st Dec 2011

Maybe Father Christmas is going to deliver for equity investors after all following a strong rally in US markets yesterday on the back of – not very much in all honesty. 

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