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Market Comment 2nd July 2012

Markets are in much better shape following the EU summit at the end of last week but there is unquestionably still some scepticism regarding the viability of what was agreed and whether it will be enough to pull the eurozone back from the brink. 

For starters, even though the Dow put on an impressive near 300 point gain on Friday, US investors’ confidence dropped to the lowest level for 2012 despite ongoing improvements in the housing sector. The last session of the month culminated in the index posting its best monthly gains for the year, and so certainly across the pond investors seem to be more confident that this European sticky plaster is going to work. Not only is confidence still taking a dent but Spanish borrowing costs remain well above the 6% level and so have barely improved things for the country. Finally, the risk on trade from the last couple of sessions has been rather muted to say the least. Many of the riskier stocks like the miners have simply not joined in the party and continue to remain a drag on the indices, in particular the FTSE due to its heavy weighting in the sector.

So as the doubts remain it will be interesting to see how things pan out through the summer months. With July underway we look back at how the month has panned out for the FTSE since the mid 1980s and see that there have been as many up months as down months, so there isn’t any clear bias for the bulls or the bears. But the months that have seen gains are on average much stronger than the months where losses have occurred. The month has also been quite a volatile one in the past so maybe we’ll get more of the same this time round, but with the Olympics only a few days away volumes could suffer.

The FTSE is adding to Friday’s gains this morning but with no real great conviction. At the time of writing we are higher by 15 points to 5586 just below the resistance seen at 5600 and 5640. This has attracted some sellers who think that the resistance will win over and we could head back down again, but a break above here might see a test of 5715 and 5760. To the downside 5530, 5470 and 5430 are all seen as support levels.

Economic data comes in the form of lots of manufacturing numbers. PMI surveys from the US, Europe and UK will all be watched to see how the sector is getting on as it continues to perform significantly under par. There’s also the EU unemployment figure which is expected to tick higher this morning and then for the rest of the week we gear up for the BOE and ECB rate decisions on Thursday and the non-farm payroll on Friday.

The euro rebounded 226 pips against the US dollar to 1.2666 as the deal by the EU officials managed to calm the markets, easing fears of an escalation in the sovereign debt crisis. Expectations of an interest rate cut by the ECB at its meeting this Thursday also might have supported the shared currency. Usually a rate cut is a bearish feature but this time it could be seen as an indication the so far reluctant European leaders are ready to take action. This morning the single currency is at 1.2635.

The global markets cheered the EU decision to ease the bailout rules for banks and the feel good factor also sparked a sharp recovery in precious metals. As the risk appetite made a comeback gold prices gained $46 to $1597, even breaking above the $1600 mark briefly.

A commitment by Europe to use funds for bailing out banks directly was met with a sigh of relief by energy investors who pushed the WTI crude prices $6.50 higher to $84.96. Crude prices were the best performers in the commodities class; nevertheless, the climb in WTI prices was accentuated by returning fears over Iran’s threats to close the Strait of Hormuz.
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Market Comment 2nd July 2012

Markets are in much better shape following the EU summit at the end of last week but there is unquestionably still some scepticism regarding the viability of what was agreed and whether it will be enough to pull the eurozone back from the brink. 

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