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Market Comment 6th July 2012

The lack of surprises from Europe’s central banks yesterday left investors rather deflated as expectations had been built in for exactly what happened, but it was the downbeat comments from the President Mario Draghi that really dampened spirits and he even went so far as to say that he expected the impact of his action on the eurozone’s economy might be limited. 

Needless to say the bulls hardly came charging out into the ring as so world markets were left rather disappointed, and that’s despite China taking similar action by reducing rates in an attempt to help growth which would usually lead to a decent bout of risk appetite.

Question marks still remain over the BOE’s quantitative easing program which they have claimed in the past has directly contributed to higher growth. Unfortunately, at the same time it has caused inflation to spike to levels that were much higher than the eurozone and across the pond which has been the real factor hurting the pockets of consumers. For an economy that remains stuck in a rut and most likely to remain in a recession in Q2 if the recent PMI data is anything to go by a little more than an extra 50 billion in QE is going to be needed to assist in the recovery. Sometimes recessions can be long and arduous and in this case things are not being assisted by the dire straits of our biggest trading partner. I’m surprised that the BOE doesn’t just keep hold of their cash or try something different, but the problem is they need to be seen to be doing something even if it still is unclear as to just what good QE does for the man on the street.

For the FTSE the 5700 to 5725 level remains the near term resistance that it simply can’t get above for now. With little support from US indices yesterday it’s not surprising that we see a little more profit taking with the index down some 10 points to 5680 at the time of writing. Clients continue to hold the bearish view around these levels expecting little in the way of upside left in the index. You have to feel that this doesn’t seem like a bad position to hold since the resistance isn’t being taken out.

The big event for today is of course the non-farm payroll. Following yesterday’s strong ADP figure there’s a glimmer of hope for some better news regarding the US labour market today, and certainly Mr Obama will be thinking that. Consensus is for 90,000 new jobs, up from last month’s 69,000 whilst the unemployment rate is due to remain at 8.2%.

The big move in markets yesterday was in EUR/USD as the benchmark interest rate in the euro area was reduced to a record low of 0.75 % in a bid to stop the region’s debt troubles. Clients picked the move nicely as many were short going into the rate decision before neatly coming out around the lows as well. As well as the rate cut at the same time across the pond the ADP employment data came in a touch better than estimated thus supported the greenback. Consequently, the EUR/USD pair tumbled 135 pips to 1.2389 and this morning we’re just 10 points below here at 1.2379.

The lack of surprises in the interest rate cut by the ECB didn’t help gold’s case, and the ongoing deterioration in the economic growth picture is keeping fear of inflation away, for now. Furthermore, as participants rushed into the greenback, gold prices plunged $10.2 to $1605.00 losing again the battle for the safety hedge.

The WTI crude prices posted a slight decline to $87.22 yesterday driven by a strengthening in the US dollar and fading hopes the central bankers will add more stimulus than whatever markets expected. It did that despite a surprisingly bigger than anticipated draw in the US weekly crude inventories, as indicated by the Department of Energy’s figures released a day later due to the Independence Day holiday.
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Market Comment 6th July 2012

The lack of surprises from Europe’s central banks yesterday left investors rather deflated as expectations had been built in for exactly what happened, but it was the downbeat comments from the President Mario Draghi that really dampened spirits and he even went so far as to say that he expected the impact of his action on the eurozone’s economy might be limited. 

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