Yesterday saw a continuation of the volatility that has very much been the theme of the second half of this year.
After the bumper round of loans provided by the ECB markets pushed higher in a flurry of buying as investors foresaw a thawing of the credit markets with fresh liquidity flooding in. It sounds like easy money for the banks, lent at only 1% over three years, however it all depends on how they use it.
If you can get a loan at 1% and then buy Spanish or Italian debt at 5 to 7 percent then it’s a no brainer, but would you want to risk exposing yourself to countries that are heading towards recession if not already in it?The idea is to repair Europe’s banks that are clearly desperate for cash in order to prop up their balance sheets, so that they have much more breathing space to absorb the losses on the 50% haircuts and be able to recapitalise in an orderly fashion. The problem is that that’s precisely what all this new money is likely to do, rather than trickling down to cash hungry businesses and helping to boost the European wide economy.
Just as soon as the markets rallied on the news that the amount of loans provided smashed expectations indices reversed their gains and we ended up with a poor session. This morning however markets are a little perkier following a flat to positive session for US markets. Buyers seem to be relieved that the sell off in Europe did not follow through to US trading and if it wasn’t for the Dow and S&P we would probably be much lower. US investors seem to be gearing up for Christmas and the year end much more so than their European counterparts. In reality the US economy is growing well and some of the recent economic data has been surprising to the upside. It’s as if they are largely ignoring the problems going on in Europe, despite the threat of what it could cause them due to their banking sector’s exposure to Europe’s banks.
For now the FTSE is heading higher and so maybe, just maybe, we might see that gain for the month of December. Currently at 5450 the index is down 1% so far this month, whereas the Dow is just sitting in positive territory.
Lots of data out today with the final release of UK GDP which is expected to remain at 0.5% for Q3, but that’s probably about as good as it gets going forward with expectations for the UK economy to really struggle in 2012. Next quarter is expected to show a rise of about 0.3% and then a possible contraction in the second quarter ahead of the Olympics when things are expected to pick up again, so for now an official double dip in the UK is not expected. We also get the 3rd release of US GDP for Q3 due in at 2.0% and at the same time initial jobless claims, we then end the day with University of Michigan confidence.
The euro spiked higher yesterday to around 1.3198, which was its highest level in over a week, on the back of the ECB’s lending spree to 500 eurozone banks. But within four hours the euro gave back around 150 pips from that high. Traders know that this won’t be the end of the debt crisis and credit rating cuts around the eurozone are imminent. EUR/USD is on the up at the moment though, as traders are anticipating decent US data later today and have good expectations that things are improving across the pond. Therefore, they are happy to take on more risk today and move out of the safe haven dollar. As we know though, we are in a bearish market and any upside is likely to be limited to very short term. The pair is currently trading at 1.3110 and is heading towards its next target level at 1.3140.
Gold can’t seem to maintain any traction above 1600 as it’s drifted sideways to slightly downwards in the past few sessions. At 1615 this morning key levels to watch are 1588/82 to the downside and 1641/50 to the upside.
Brent enjoyed a day of risk on trade yesterday, not suffering the same fate as indices as it bashed through $106 and is now firmly back above 107 at 107.75.
