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Market Comment - Wednesday 9th May 2012

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The anti-austerity rhetoric coming from France and Greece hasn’t been good for the markets in the last few days and the uncertainty that comes with it has seen the FTSE wipe all its gains for 2012 out yesterday. There’s nothing wrong with calling for more growth measures but it has to be in the context of existing fiscal capabilities.  Without some sort of prudence government spending and debt burdens will continue to spiral and be even more difficult to address down the line.

In the case of France the share of government spending in terms of their GDP is amongst the biggest out of most Western economies and so increasing this will not be looked upon favourably by financial markets.  The new French President, in the end, scraped into office with his message of change to try and renegotiate the most recent European fiscal pact, increasing the minimum wage, reducing the retirement age which Sarkozy had fought so hard to increase, and taxing the rich.  Many of these measures were designed to do what all politicians want and that’s gain power, so we will see in time whether his bite is as big as his bark.

His bark could become ever more quietsome if the political fallout in Greece continues and ends in yet another default and ultimately an exit from the eurozone.  The losses for French banks would be considerable and the French Cac saw some of the most selling yesterday in comparison to other European indices.  If the French government had to bailout one of their banks then this would cause serious ramifications for their fiscal situation, and then Monsieur Hollande’s bark really would turn into a whimper.

So across both sides of the Atlantic equities sold off primarily down to the political uncertainty in Greece rather than France as the bets that they will soon have to exit the eurozone increased.  Whilst the Dow dipped below the 13000 level once again it did manage to rally from its lows and so this morning European indices were expected to open in the black, but at the time of writing few buyers have emerged and so they were roughly flat at 5555.

The euro was again under pressure yesterday following a political impasse in Greece where leaders failed to form a government thus fuelling worries of an exit from the euro area.  However, on the other side of the coin there is also growing speculation that the Fed will have no choice but to consider QE3 at some point if things turn really ugly in Europe.  As a result the euro lost 55 pips against the greenback to 1.3002, but for now that could be seen as mild considering we’ve already dipped below this major support area, and the single currency is at 1.2985 against the dollar at the time of writing.

Mirroring a sell off in equities and commodities, gold also posted a steep decline after developments on the Greek political arena threatens to reignite the European debt crisis.  Investor sentiment is becoming more and more pessimistic and even gold’s safe haven status isn’t enough to attract investors who are heading into the US dollar instead.  The drop of $33.57 to $1604.39 took the spot price through support at 1612 and at the time of writing below the psychologically important 1600 mark at 1591.

Besides political turmoil in Greece we had the Saudi Oil Minister Ali Naimi saying yesterday that ‘oil prices were too high’.  That added downward pressure for the WTI crude price which continued its plunge to $97.01, 95 cents lower for the session.  From the technical point of view however, it was the second time WTI crude prices had found good support around $95.50 level and rebounded.  Although another test looks underway so watch out for repetitive failures at the above mentioned mark.

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Market Comment - Wednesday 9th May 2012

The anti-austerity rhetoric coming from France and Greece hasn’t been good for the markets in the last few days and the uncertainty that comes with it has seen the FTSE wipe all its gains for 2012 out yesterday. There’s nothing wrong with calling for more growth measures but it has to be in the context of existing fiscal capabilities.  Without some sort of prudence government spending and debt burdens will continue to spiral and be even more difficult to address down the line.

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