Can this bounce turn into more of a rally?

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by Bettingpro Staff

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Risk appetite just seems to be improving somewhat with yesterday’s big move higher, but this morning investors are trying to size up the rally and aren’t quite sure yet as to whether the move was a precursor to further strength.

At the time of writing the London index is flat at around 5760 with the bulls eying up the 5800 level and then 5835 over the near term which is the higher end of the upward channel that has just been forming in recent days. German confidence data was one of the main reasons behind yesterday’s rally which helped in reducing debt yields for the likes of Spain and Italy, and this spurred on equities even more.

It’s a retail focused week and today all eyes are on Europe’s biggest retailer Tesco, which has posted slightly better than expected results but the jury is still out over the supermarket’s longer term prospects following its profit warning earlier this year. The US has always been a tough nut to crack and the amount of money that Tesco has thrown at its attempt to expand across the pond is not exactly insignificant. The problem is that US consumers simply aren’t tempted to shop in a retailer that they know little about when they are so used to the likes of massive supermarkets such as Wall Mart, and when we say supermarket, over there they really mean it as there’s so much you can buy in them.

Even though we’ve seen some decent strength over the past few days there is still a degree of caution amongst investors and today’s economic data focuses on UK unemployment numbers. The picture of the UK labour market is not expected to improve much with the rate of unemployment due to rise from 8.3% to 8.4% and the claimant count painting a rather grim picture following February’s bigger than expected rise. On top of this wage growth is really struggling so even those people who are lucky enough to have a job are not seeing much of an uplift in their salary. This is causing the great squeeze for the consumer as inflation continues to rise. Even though recent PMI and other sentiment data has been improving firms across the UK are still very much in defensive mode and refusing to invest heavily in more staff.

Also this morning the BOE minutes will reveal how many members of the MPC voted for further QE. Last month there were two members saying further money printing was required, but considering that yesterday’s inflation data actually came in higher than was expected this stance might have changed a little. The Bank has been expecting inflation to fall significantly this year but this has simply not materialised due to oil prices remaining stubbornly high, and any further QE is likely to keep prices above and beyond target for some time to come.

The pound strengthened on the back of the inflation numbers which showed prices continued to rise, decreasing the chance of another round of quantitative easing. Cable closed at 1.5932, nearing in on the stiff resistance level at 1.6000 having traded as high as 1.5969. With the MPC minutes expected to show diminished appetite for further stimulus the pound could have a serious test of the 1.6000 level but is just holding back at the time of writing with GBP/USD trading at 1.5900.

Gold price hovered around the $1,650 level on Tuesday, as a successful Spanish debt auction eased fears about the euro zone debt crisis, reducing the demand for save haven assets. After testing new lows for the week down at the $1634 area and gains in equities keeping traders bullish, gold may struggle on the upside without any catalyst. This morning the yellow brick is bang on the 1650 mark.

Crude prices managed to hold above the $118 a barrel mark on Tuesday as a successful Spanish debt sale eased fears that Europe's debt crisis could flare again and expectations that the Seaway pipeline reversal will unclog a supply backlog. With today’s oil inventories expected to show a sharp drop in the stock pile prices could be well supported on the way to test the $120 level again, but with the momentum to the downside this will have to be quite a large build in stockpiles.

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