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Market Comment 22nd June 2012

The Dow Jones plunged sharply yesterday losing 250 points to 12,570 recording its second largest fall of the year largely on the back of increasing signals the global economy is heading back into recession. 

Not only did we see sales of existing homes in the US decline, weaker manufacturing numbers and claims for jobless benefits come in higher than estimates, we also saw trouble from the eurozone with dire manufacturing numbers, a worse than expected services survey from Germany and then to cap things off China’s output contracted. This plethora of poor economic data was then compounded by the credit ratings agency Moody’s downgrading 15 of the world’s largest banks.

The downgrade to all these banks, even those banks that are majority or partially government owned, serves to highlight not only that banks remain risky assets for shareholders to hold but the serious difficulties that they continue to face in what is increasingly becoming an even more hostile economic environment. Regulators are splitting them up and imposing more stringent rules upon them, asking them to hold more capital in reserve and then at the same time they are saying they need to lend more to businesses to get investment and growth going again. This move by Moody’s doesn’t help matters as it’ll only make their funding more expensive, but at least the move isn’t a complete surprise and none of the banks suffered a huge slash to their ratings.

All this negative news has snuffled the recent strength in equity markets and shows once again the fragility of the global economic situation. Naturally this has led to a bout of risk aversion this morning affecting all assets classes with even gold taking a hit as well. The FTSE at the time of writing is at 5520, lower by 45 points, testing near term support around this area. A break below 5500 could open up the way for further weakness to 5430 and possibly 5380. To the upside resistance is seen at 5560 and 5610.

This week has seen a raft of economic data, most of it bad, turning what had started to be a strong week for the markets into a not so strong week and today we end quietly with only the German Ifo survey to get our teeth into. Considering yesterday saw a worse than expected services number and despite a Spanish bailout and desired outcome from the Greek elections, the eurozone crisis is still very much in everyone’s minds and we could see the expected decline to 106.2 come in lower.

A slump in investor sentiment weighed on the euro as output figures around the world tumbled steeply, sending everyone into the safety of the US dollar. There are now growing expectations the ECB will ease its monetary policy in trying to deal with debt ridden Greece, Spain and Italy. The common currency lost 149 pips to 1.2548 as the euro area is confronted with additional pressure on its banks but also on its sovereigns.

We saw a violent sell off in gold prices yesterday below the psychologically important $1600 mark as it becomes clear the world is still in deflationary mode. Commodity prices are slumping, the developing economies are contracting and the precious metal is currently losing the safe haven battle with the greenback. Overall gold prices dropped $42 bucks to $1564 also being hurt by what markets believe is a lack of conviction in Fed’s actions.

The WTI crude prices followed a sharp nosedive in equity markets which in turn was triggered by yet another string of disappointing economic data. It dropped below the $80.00 mark for the first time since October last year, closing $2.88 down at $78.20. A higher US currency added extra downside pressure as did the oil inventories statistics released on Wednesday which indicated supply at record levels, last seen in 1990.
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Market Comment 22nd June 2012

The Dow Jones plunged sharply yesterday losing 250 points to 12,570 recording its second largest fall of the year largely on the back of increasing signals the global economy is heading back into recession. 

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