Market Comment - May 21, 2012

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by Bettingpro Staff

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Another G8 summit passes and the same old hot air emerges from the talks where leaders agree that something has to urgently be done about the eurozone crisis.

But the only thing that is agreed is some more meetings in the coming weeks, where further discussions can be had about the never ending troubles in the world’s largest economic block.

The main thing though to come out of this weekend’s talks was the increased pressure on Germany to accept the idea of a Eurobond. The creation of such an asset would not be the only solution needed to resolve Europe’s woes, but it would certainly go someway to calm the waters. The major issue with this is that it would have to come with major strings attached in order to avoid the peripheral states going on a Eurobond issuing spree, precisely the opposite of what Germany has been trying to prevent by instilling some sort of fiscal discipline into the region. The other stumbling block is that Chancellor Merkel is simply not going to allow it because if she does make Germany the back stop behind a Eurobond, ultimately having to pay for the PIIGS profligacy, she will most likely lose power when it comes to the Germany general election in a year and a half’s time. If there’s any one thing that political leaders really hate, it is losing votes.

The markets have commenced will a little spring in their step this morning with the FTSE up by some 15 points at the time of writing as polls in Greece suggested that there’s a chance a pro-bailout coalition might be formed in just under a month’s time. But we’ve seen this all before in recent weeks with the bulls looking like they are just about to take control of matters and push the market higher, only for it fizzle out quickly. Support is seen at 5235 and 5185 meanwhile the downtrend is capped by the upper downward trend line which comes in at around 5300. Other resistance is seen at 5360, 5435 and 5490.

There’s nothing in the way of any meaningful economic data out today, but things get a little more interesting as the week goes on. Inflation numbers are out tomorrow, then retail sales and the BOE minutes on Wednesday, and then the second reading of Q1 GDP on Thursday. All in all a quiet week on this front as nothing is released on Friday so we’ll continue to focus on the next summit and developments in Greece.

Amid ongoing turmoil in the Greek political arena, some reports mentioned fresh support for a conservative party which entertains the idea of remaining in the euro area. In addition, European leaders seem determined to hold the Union together which includes Greece. So the euro was able to take a breather on Friday recovering 97 pips to $1.2778, but it will take a lot more to overturn that abrupt downtrend. So far this morning has already seen a bit of strength with EUR/USD at 1.2780.

Gold continued its rebound last Friday, gaining $18.73 to $1592.90 as bargain hunters were again present in the market. By and large the reason behind the rally was a weaker greenback making the dollar denominated gold look cheaper. It’s also possible that some investors took a second look at Fed’s choices and decided that QE3 is still a possibility.

It did not matter too much that the US dollar was under pressure last Friday which usually tends to support crude oil prices. It was rather the continued weak fundamentals picture in the US that dominated the energy sector already spooked by fears that oil demand in Europe faces even bigger challenges. As a result WTI crude prices fell another $1.38 to $91.48, but not before touching $90.93, the lowest point since Nov 3rd last year.

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Market Comment - May 21, 2012

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