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Market Comment 27th July 2012

So the day is upon us and it’s as if by magic Mario Draghi’s comments yesterday came on the eve of the opening of the Olympic games giving a boost to the markets and now after years of anticipation the big day is upon us.

Many are hoping that these games will give a similar boost to the UK economy as Draghi’s comments gave to equity markets yesterday, but rather like the doubters who see the remarks about the euro nothing more than hot air, we can’t expect a few weeks of sports to change the course of the UK’s ailing economy. Lots has been said and made about just how much the Olympics will contribute to our GDP and with many differing predictions we can at least expect it to pretty much wast its face with the chance that more benefit will come from hosting the games. The long term effect though is rather more important and the last thing we will want to see is a similar ghost town that now exists in Athens. One would like to hope that will all the negative news out there and following the dire GDP figures released this week that things can’t get all that much worse.

Markets across the continent rallied significantly after the ECB President announced that he will do whatever it takes to save the single currency. Many of the indices in Europe put on triple digit and large percentage gains as investors rushed to buy beaten up stocks as the prospects of more bond buying by the ECB attracted bulls in their many. The FTSE meanwhile was a little less sanguine as it only gained 1.4% compared to the Dax’s 2.8% and the Cac’s 4% perhaps showing that UK investors are a little more sceptical of what Mr Draghi said as after all is was nothing more than just words and no policy measures. Of course policy measures can not be expected to be announced at such a time so the market will want to hear more at the ECB’s next meeting at the beginning of August during a week where the Federal Reserve and the BOE also convene for their interest rate meetings.

But this brings us onto the wider argument about the ECB and its remit. In the past it has done its Security Markets Program, its LTROs which is claims is all to assist in its monetary policy and so there’s little more it can do other than aggressively start buying SPanish and Italian bonds again in order to bring down their borrowing costs. Meanwhile as it balloons its already large balance sheet the Germans will be getting increasingly more nervous about the possibility that they will eventually have to back the ECB at great cost to the taxpayer. None of this however doesn’t address the ECB’s inability to undertake full blown bazooka type QE as the laws simply won’t allow it. Treaty changes will be required but the sort of changes needed will test the resolve of even the most pro-european German voter. Only time will tell what path the euro takes, but as mentioned for the UK markets there seems to be a little more scepticism than most.

European indices are mixed this morning and the FTSE is adding a few points to yesterday’s gains at the time of writing taking it to 5585. US GDP data will be closely watched due out at lunch time today and then things are expected to wind down for 20.12 London time when the games begin.

Needless to say Mr Draghi’s comment yesterday led to a spike for the euro and his statement in itself was the biggest market mover yesterday pushing the euro 130 pips higher to $1.2276. However, it is likely investors will be following closely to see if words will be accompanied by actions.

Gold continued to rally yesterday gaining $9.70 to $1615.2 after the ECB indicated its supportive stance for the euro. Following speculation of more stimulus measures in the US, it seemed Europe was on the same path which down the line could bring back inflation. The precious metal is still seen as a good hedge against higher prices.

Positive figures for the US economy, especially relating to employment sector and reassurances from the ECB about defending the euro failed to trigger a significant rise in crude prices. Instead, the WTI crude prices gained only 29 cents to $89.39 a barrel. It might have been the case that energy investors were still influenced by Wednesday’s bearish report on inventories and took a cautious approach.
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Market Comment 27th July 2012

So the day is upon us and it’s as if by magic Mario Draghi’s comments yesterday came on the eve of the opening of the Olympic games giving a boost to the markets and now after years of anticipation the big day is upon us.

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