Yesterday was a risk off day as everyone fell from equities to commodities with investors seeking the safe haven of either cash or stable government bonds.
In an unusual move the commodity markets suffered severe weakness just as indices did and it was quite a surprise to see crude come off as much as it did considering the slightly more “hawkish” stance towards Libya.
The situation in Libya remains entirely unclear with reports that Gaddafi’s air force is deliberately missing the rebels and for now he has not used anywhere near the force that he has at his disposal. Western politicians are now dithering over what action to take as some want a no fly zone but others (who you have to feel have the higher moral ground for their stance) want clear multilateral agreement including from the Arab League before any military action is taken.
This morning markets have drifted even lower after Japan is hit by an earthquake and one has to think when is all this going to stop? Earthquakes, tsunamis, sovereign debt crises and civil wars mean investing in equities is not a safe place to be. The Dow found support at 12000 last night, but the futures are now below there by some 60 points and the S & P breached the key 1300 level. These breaks below here could be seen as a technically weak signal of further declines to come. With the headlines filled with doom and gloom investor sentiment is being sapped. So for the FTSE the key downside level to watch now is 5800 which so far at least we have managed to bounce off. A break below 5800 could really change the picture of things over the medium term.
The markets were also a little unsettled by China’s trade balance coming in as a deficit which was not expected and this morning we’ve seen Chinese retail sales. The figure is a whopping 15.8% which is lower than market expectations but reaffirms the strength of consumer demand in the world’s fastest growing economy, despite the recent uptick in inflation.
This morning also sees UK PPI data which surprised to the upside last month and is expected to jump again today. No prizes for guessing that the main contributors to higher producer prices are food and oil, so the pressure on inflation remains significant.
US retail sales data at lunchtime will probably be the highlight of the day which is expected to provide a strong reading, with car sales in particular contributing to the strength. We end the week with Michigan confidence and business inventories for the US and the feeling is that these will have to be spectacular to stop the selling.
Currency markets are have seen dollar strength so far this week as the greenback’s safe haven attribute comes into play, although this could also be seen as a slight squeeze on the bears as opposed to a change in the trend. Cable nearly hit 1.6000 this morning but is just bouncing in early action and EUR/USD hit 1.3800 and too has bounced a little to 1.3835. For Cable the 1.6000 level is quite crucial support and below there 1.5955 meanwhile to the upside past support around 1.6125 is seen as resistance. For EUR/USD the recent lows at 1.3800/775 and the 1.3750 and 1.3710 are support with 1.3870 (previous support) seen as resistance.
Gold suffered a severe bout of profit taking yesterday almost reaching 1400 but is bouncing this morning back to 1416. Clients remain long the precious metal having ridden the recent retracement with a few even adding to long positions.