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Market Comment 4th July 2012

All eyes will be on Mr Diamond today as he appears in front of MPs to be grilled by them over the Libor issue. 

The fact that he has resigned is unlikely to make MPs any less hostile towards him but equally it puts him in a much stronger position to defend himself. The mudslinging might make interesting viewing as the BOE and senior politicians are dragged into the fray, but importantly, probably every other bank CEO will be watching to see what the implications, if any, are for them.

We can expect “libor-gate” to drag on and on as the Parliamentary committees will bring more people to answer their questions and then an inquiry is only going to serve the issue to further dominate the headlines. Whilst the drama unfolds there will be important questions to be answered, such as how long was it known that this was a widespread practice and what was done about it, then to what extent were other people aware at places such as the BOE. The internal memo released by the bank yesterday is no doubt just the start of a raft of evidence for him to defend himself.

Onto the markets and a US factory orders reading yesterday that was better than expected allowed investors to overturn the pessimism regarding manufacturing figures a day before. This along with the growing speculation the Fed will step in and provide stimulus got bullish US investors out once again to push the Dow up another 75 points to 12,943. Once again US markets look much stronger than their European counterparts and having broken to new recent highs could be gearing up for another little push higher. We won’t get that today however as the US is closed for the Independence Day holiday with the focus shifting on the non-farm payrolls on Friday.

The knock on effect for the FTSE this morning from the Dow’s rally last night did initially have us calling the index to open higher, but a pull back in copper and crude has meant we’re now in the red at the time of writing. Trading at around 5670 and having broken above the near term resistance the bulls will still be eying up the next resistance levels at 5715 and 5760, but without any direction from US markets later today this might be a bridge too far for now.

Economic data comes primarily from Europe today with the UK’s PMI services figure one of the highlights. This is expected to decline only slightly and may show its first signs of weakness after months of coming in higher than expectations. Unfortunately for the UK economy the strength in the services sector has not been enough to prevent a double dip recession, as yesterday’s construction figure indicated, the weakness in this area and manufacturing is causing the recovery to stall. Also today from the continent there are Italian and European wise PMI services figures as well as retail sales and the final reading of GDP from the EU.

The euro edged higher against the greenback, 21 pips to 1.2604, on modestly improved market sentiment once the factory orders in the US surpassed the initial estimates. However, it should be added that the volumes were light in a tight range ahead of the US Independence Day holiday. Furthermore, it could have been a reluctance to commit too much ahead of the ECB meeting on Thursday.

Signs the economic recovery remains tepid fuels speculation the central bankers will be forced to adopt extra measures to spur growth. As a consequence investors are looking to buy gold as a store of value. So the precious metal gained 20 bucks to $1616.90 and could post a more significant recovery path if the QE3 is announced.

With Iran back in the headlines it was only a matter of time until the geopolitical risk added a premium into the WTI crude prices once again. Yesterday, it did just that as US crude surged $3.99 to $87.66. The rally might have been accentuated by some short covering ahead of the ECB, BOE and non-farms.

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Market Comment 4th July 2012

All eyes will be on Mr Diamond today as he appears in front of MPs to be grilled by them over the Libor issue. 

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