European markets continue to lag their US counterparts with the Dow putting in another decent gain yesterday after nearly hitting a new high for 2012, but a downgrade to Spain’s credit rating by S & P overnight has reminded the bulls of the headwinds that investors currently face.
Earlier this morning we had been calling the FTSE to open flat at around the 5750 mark, but on opening we’re in the red by some 30 points at 5710. Spain’s second cutting to its credit rating this year is another shot across the bows of Europe’s fourth largest economy, and whilst equity markets are dipping this morning the country’s ten year government bond yield is heading in the opposite direction, around the 6% level. It’s not only that Spain has a banking industry that’s in so much trouble that it makes our banking crisis look like a picnic, but they still suffer from rabid unemployment that is expected to rise even further. On top of this their Prime Minister continues to insist that the country does not require any financial aid. The markets have heard this all before when similar claims were made by the leaders of Greece, Ireland and Portugal and they remain unconvinced. At least for now however the bond yields have not spiked completely out of control and we’re not seeing wide spread panic.
So as mentioned the FTSE is softer on the open and in the past month and a half it has been forming a bit of a downward trend since hitting its highs for the year in the middle of March. The trend sees resistance around 5790 which is the upper downward trend line with other significant near term levels at 5830 and 5900, meanwhile support is around 5635/00. The trend looks like it could be forming a bullish flag so a break to the upside might get the bulls excited, but it’s unlikely to happen today unless we see something spectacular from the US GDP figures this afternoon.
Market expectations for Q1 US GDP are for an annual growth rate of 2.6% slipping from 3% from the previous reading. However, economist’s forecasts have been spread over a wide range of 1.2% to 3.6% given the mixed signals the economic data from the world’s largest economy has been sending out lately. Whilst equity markets have benefited from global central bank stimulus over the last few months, traders will be keen to see if any of this has actually benefited underlying growth. With China slowing and the weaker European nations dragging the wider region closer to recession, the need for the US to maintain its “moderate” recovery becomes ever more crucial for the global economic outlook.
Despite rising in the morning to 1.3263, the highest level for more than three weeks, the euro finished the day 12 pips in the red at 1.3208. The reason behind it was a cut in Spain’s sovereign debt rating from A to BBB+ by Standard & Poor. It came as a reminder that Europe is still mired in financial troubles with the so called peripheral economies getting worse, and this morning the single currency is in retreat at 1.3160.
After digesting the Federal Reserve’s statement on monetary policy, gold buyers decided to step back into the market pushing the price up $11.00 to $1654.90. The spectre of a prolonged period of low interest rates in the developed world still offers good support for the yellow metal. Mixed economic indicators in the US and growing uncertainty for the European politics could also raise demand for gold as a hedge. This morning the precious metal is at 1650.
Initially, the WTI crude prices were under pressure as the figures for the US jobless claims showed an employment sector still struggling to present itself in a better light. However, housing data improved investor’s sentiment by surprising to the upside. A rally in the stock markets also provided guidance to energy market participants who ultimately pushed the WTI crude prices higher for third time in a row, a 59 cents gain for the session to $104.55. However, this morning’s risk aversion means a decline for crude with WTI at 103.75 at the time of writing.