The FTSE is holding up pretty well considering that earlier we were calling the index to open flat to lower and the US session didn’t exactly get the bulls rolling back into their equity markets.
A credit crunch across Europe is underway which can explain why the euro took such a bashing yesterday but despite this the equity markets seem to be largely ignoring the similar situation that we faced just over four years ago. Just as back in the middle of 2007 when the last credit crunch lead to the then banking crisis, this time there’s a real threat that this one could fan the current sovereign debt crisis.
As banks deposit money overnight with central banks as opposed to other banking institutions the lack of liquidity means that less cash is available to drip feed through to the wider economy. This causes the vicious circle to continue going round as the lack of funding to businesses and individuals knocks growth on the head which in turn puts further stress on countries budgets which are already feeling the squeeze from austerity.
The one major thing that Europe really lacks at the moment is confidence and that confidence doesn’t exist because there is no clear growth strategy. It’s all about austerity and imposing fiscal discipline, which is required to a certain degree, but without any real growth plans the mess will only get worse.
A little bright spark from yesterday was the decline in inflation from its peak, which will be received as welcome news for shoppers around the UK particularly at this time of year. For the second month in a row inflation has declined from its peak and as we enter the New Year, when this January’s VAT hike will come out of the numbers, the headline rate should continue to drop. It would really be nice to see petrol stations take a leaf out of supermarket’s books to pass on lower oil prices to motorists. It still costs a fortune to fill up the tank and as commodity prices have eased somewhat in the latter part of this year, the price at the pump still seems to remain high.
The December rally is proving hard to come by this year with the FTSE below where it commenced the month. At the time of writing those Christmas bulls are trying their best to push us higher with the FTSE trading at 5465, but we’re still some 0.7% lower so far. Even though the rallies seem short lived at the moment there is still the feeling that a Christmas rally is possible as the nearer we approach the festive holidays, the closer we get to the more bullish part of the month from a historical point of view.
Economic data today comes in the form of UK unemployment figures which are set to make for gloomy reading. The jump to 8.3% last month was worse than expected and today is expected to see this push higher to 8.4%.
As mentioned above the euro was beaten up badly yesterday as bears drove the single currency back down towards 1.3000 against the dollar. Here it seems to have found a degree of support with EUR/USD trading at 1.3040 at the time of writing. Key levels to watch are 1.3000 and 1.2950 to the downside with 1.3100/60 and 1.3240 being seen as resistance to the upside.
Pressure for gold was given yesterday from a strengthening greenback, which mainly denominates gold and ongoing fears over an escalation in the European debt crisis. Signs were also there that a number of economies were seeing lower inflation and as gold is used as a hedge against this, demand was reduced for the precious metal. By the end of the session, the yellow brick had lost 35 bucks to 1630.9, a level that hasn’t been seen since October 21st.
Crude investors ignored the rally in the US dollar yesterday and traders saw the price of black gold rebound after rumours were circling that Iran had closed the strait of Hornuz, the most important shipping channel. Further support was provided by speculation that the Federal Reserve will be releasing a third bout of quantitative easing and this all helped Brent gain 190 ticks to close at 108.99. This morning Brent is trading at 108.70.
