Stock Market Update 25 May 2012

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Stock Markets: 25 May 2012

Markets are edging higher as buyers test the water after weeks of losses and we are on course for our first weekly gain in four weeks.

This comes despite poll readings in Greece that indicate anti-bailout party Syriza could win the next Greek election outright.

Whilst the costs of a Greek exit are completely unknown, online spread trading investors are getting used to the idea and European political leaders have been talking about it more openly.

The euro remains firmly in a downtrend, whilst investors continue to pile into German bunds that are returning them next to nothing. In addition, Spain's economy is continuing to be crippled by rising borrowing costs and bank bailouts.

This is a toxic recipe that shows just how serious the European crisis is becoming. However, now that we've had a big shake out in equities, it would seem that the selling has been exhausted for the moment.

Worries about an economic slowdown in China kept the Dow Jones on the back foot initially. But later on, Italian Prime Minister Mario Monti joined the French leader Francois Hollande in becoming more vocal with support for Eurobonds.

That gave investors some optimism; enough to push the Dow Jones back up to close the session 38 points higher at 12,529.

The mildly bullish sentiment from European stocks this morning looks to be filtering into US futures already, as we're currently calling the Dow to open 35 points higher.

The FTSE is currently some 20 points higher, whilst the German Dax is powering ahead by nearly 1%, up by 50 points.



Stock Markets: 24 May 2012

So we saw nothing new from the EU leaders' dinner last night; to have expected anything more was very wishful thinking.

The usual platitudes, back slapping and the message that they want Greece to remain in the Eurozone makes the message clearer than ever. It's very much down to the Greek people to decide whether their fate lies with the single currency or the drachma.

The real decisions, on the introduction of a Eurobond or a more effective firewall, have been delayed once again to the next summit at the end of June, by which time it may be too late.

If the Greek people don't vote for a pro bailout party then the only other option for them is to leave.

When it comes down to it however, the Greek public are still in favour of remaining in the single currency. Therefore, when they are faced with an in-or-out vote they could end up having to reject the extreme parties.

The only good thing to come out of a possible 'Grexit' will be that markets will no longer be riddled with uncertainty.

Stock market indices might even rally should a Greek exit become the clear course. Having said that, any relief rally could easily be short lived as the focus shifts to other countries.

Unfortunately, the euro saga is set to run and run and will probably serve to keep volatility high.

That volatility was seen last night in the US session where the Dow Jones rallied some 100 points in its final hour of trading.

That recovery has filtered through to the European session this morning and the FTSE is higher by some 50 points at the open.

Considering the strength of the rally across the pond, which formed a very bullish candlestick, there might be some bulls tempted to push the market higher from here.

However, with volatility remaining high, we may only see brief rallies as investors are undeniably risk averse at the moment.

A significant example of this risk aversion was seen yesterday; the Germans saw a well subscribed bond auction sell 2 year notes with a near zero coupon.

This shows that investors are willing to invest in safe haven bonds that yield absolutely nothing but should at least guarantee that they will get their money back.



Stock Markets: 23 May 2012

Both the Chancellor and his opposite number were trying to claim victory after yesterday's speech by Christine Lagarde.

The IMF President couldn't have been more on the fence if she had tried.

Whilst endorsement was given to the coalition's current deficit reduction plans, there was a clear message that more needs to be done to boost growth.

According to Madame Lagarde, this should be done both monetarily and fiscally, and certainly goes someway to suggest that the current plans are insufficient to get growth going.

Technically the UK is now in another recession, but realistically we've been in one for the last few quarters as the recovery has been so anaemic.

This hasn't been helped by rising oil prices, which has lead to higher inflation and knocked the British consumer into a spending freeze.

We've also suffered from the ongoing Eurozone crisis as our businesses have had to endure a huge lack of confidence in investment and expansion.

The main thing that does ring true is that so far this coalition has raised taxes and attempted a very mediocre cut-back in government spending.

The deficit has been reduced somewhat, but nowhere near enough to make us competitive again.

Government spending still makes up far too much of our economy. In order to really get the private sector going, we need proper tax breaks and deregulation, in conjunction with restoring the banking sector to its full lending capacity.

Unfortunately, none of this will ever happen because such measures are seen as being unpopular with the electorate.

Many voters believe that the cuts are to blame for the lack of growth and that any sort of help for the banking sector is wrong, so it's a no win situation for the coalition.

The CFDs markets are back in selling mode again this morning, following convoluted comments from the former technocratic Greek Prime Minister, Lucas Papademos.

He started out by saying that preparations are being made for a possible Greek exit, before going on to say that he didn't want the country to leave the Eurozone.

At the time of writing, the FTSE is trading at 5345, down some 55 points after the comments from the former Greek PM caused a sell off in US markets.

Technical analysts are concerned that Monday's 'bullish engulfing' candle might have been a false signal to get back into the markets. This would suggest that the recent strength is a bear squeeze rather than a change in the overall trend.



Stock Markets: 22 May 2012

Several of our spread trading clients have been continually buying the FTSE throughout the recent bout of weakness.

They will be breathing a sigh of relief this morning after yesterday's small bounce and a continuation of the strength today.

In the past few weeks, we've seen several rallies snuffled out as the Eurozone crisis has escalated but since the G8 summit a little shift in sentiment is attracting bargain hunters out to play.

Just how far the bargain hunters can push the index is anyone's guess. However, tomorrow's EU summit is expected to see further rhetoric from European leaders that they want Greece to remain in the Eurozone. This could continue to help confidence improve in the run up to the next Greek election in the middle of June.

Another topical subject that should be discussed tomorrow is the possibility of a Eurobond. This has been discussed on many occasions but has never been introduced because of Germany's reluctance; they know they would have to be the ultimate guarantor.

Nevertheless, judging by the EU's handling of the crisis so far, even if any sort of Eurobond is agreed and created, it is likely to be very half baked. It would simply tinker around the edges rather than become any sort of big bazooka.

This morning's rally shows that financial spread trading investors are hopeful that something will come out of tomorrow's summit. The FTSE is currently trading higher by 50 points at 5355.

All eyes remain on the macro situation and the bulls will be hoping that this strength can be maintained whilst the bears will be expecting it to falter.

These sorts of bounces in a prolonged downtrend can last for some time. In order to persuade investors that the worst is over, the FTSE needs to get back above resistance levels that have served previously as support.

These are seen around 5575 and 5750, so the index has some way to go.

If we do get back towards these levels, it will probably coincide with the Greek elections which are going to be a real test of the bulls' mettle.



Stock Markets: 21 May 2012

Another G8 summit passes and provides the same old hot air where leaders agree that something urgently has to be done about the Eurozone crisis.

However, the only thing that is ever actually agreed is to schedule some more meetings in the coming weeks, where further discussions can be had about the never ending story.

The main thing to come out of this weekend 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.

One problem with Eurobonds is that they would have to come with some major strings attached in order to avoid the peripheral states going on a Eurobond issuing spree.

Such a spree would be precisely the opposite of what Germany has been trying to do 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.

If she were to make Germany the back stop behind a Eurobond, ultimately having to pay for the PIIGS profligacy, she would almost certainly lose the next German general election in 2013. If there's one thing that political leaders really hate, it's losing votes.

The spread trading markets have opened with a little spring in their step this morning, the FTSE 100 is up by some 15 points at the time of writing.

This comes as recent Greek polls have suggested that a pro-bailout coalition might be formed in just under a month's time.

However we've seen this all before, with the bulls looking like they are just about to take control of matters and push the market higher, only for any rally to quickly fizzle out.

Support is seen at 5235 and 5185, while the downtrend is capped by the upper-downward trend line at around 5300. Resistance is also seen at 5360, 5435 and 5490.

There's nothing in the way of meaningful financial market data today, but things will 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 the second reading of Q1 GDP on Thursday.

All-in-all, it should be a fairly quiet week, with nothing being released on Friday, so we'll continue to focus on the next summit and developments in Greece.



Stock Markets: 18 May 2012

We are seeing further turmoil in the spread trading markets this morning as the political situation across Europe continues to dominate.

Talk of a break-up of the single currency continued to put pressure on the stock markets, with the fall being led by the Greek and Spanish banking sectors.

Moody's has also cut the credit ratings of 16 Spanish banks, along with Santander UK, a subsidiary of the Spanish banking giant.

The downgrade came because of 'adverse operating conditions, characterised by the renewed recession, the ongoing real-estate crisis and persistent high levels of unemployment'.

The sell-off, which started during the evening session in New York, continued apace once the Asian markets opened. The Nikkei 225 fell by 3%, which was the biggest one day fall since last August.

Despite managing to rally 50 points from the overnight lows, the FTSE is currently trading at 5280, some 100 points lower than this time yesterday morning.

No economic news is scheduled for today, but all eyes will be on the eagerly anticipated Facebook flotation, due to take place this afternoon.

Despite continuing questions about the firm's ability to generate profit, the shares are in high demand and being valued at around $38. This would make the 8 year old firm worth over $100bn.

This represents one of the highest valued US share IPOs in history. However, the new shareholders will not have much of a say in how the company is run; the current owners will retain 96% of the voting power.



Stock Markets: 17 May 2012

The next month will be a battle between political will and economics.

European political will is being tested to its limit, with leaders continuing to insist that they want Greece to remain in the Eurozone. However, the likes of Mervyn King and our PM keep reminding them that a break up of the single currency is almost economically certain.

Over the past few years, politicians have been unwavering in their resolve to keep the currency union together. However, more recently, the likes of Merkel and Sarkozy, before he was ousted, had been at least discussing the possibility of a break up.

What is becoming more apparent each day is that the markets will simply not allow the likes of Greece to have their cake and eat it without paying.

The politicians are almost as deluded as many people in Greece, who think that the richer members of the Union will simply continue to throw good money after bad.

The Germans and the French remain reluctant to put more of their money on the table, either by using the ECB's potential firepower or by creating a Eurobond. However, this could make them the nemesis of the single currency that they are so desperate to keep in tact.

Risk aversion continues to whittle through the index spread trading markets and we were expecting to see the FTSE 100 open flat-to-positive this morning. However, the index has seen the sellers come in and, at the time of writing, the FTSE is at 5380, down some 25 points.



Stock Markets: 16 May 2012

Italian ten year bond yields have crossed back above the 6% level and Spanish yields have pushed beyond 6.5%.

In contrast, risk adverse investors piled into German bunds, driving their cost of borrowing even lower.

This shows that fear is gripping the markets once again, as the major concerns of 2012 look to be mimicking those of 2011.

Financial markets detest uncertainty and that is precisely what we are seeing right now. Greece has been unable to form a government and has had to call for a new round of elections on 17 June.

Up until that point, we can expect volatility to remain high and the downside pressure to continue.

On top of all the European woes, there's the concern that China is slowing down quicker than was previously thought. This is compounding fears that we will see an even greater negative effect on global growth.

After yesterday's declines in US stocks, we had been calling the FTSE 100 to open some 40 points lower at around 5400. However, the selling got worse during the Asian session and our quote was another 45 points lower ahead of the open.

Now that London has opened, the FTSE CFD trading market is actually at 5380 and investors are closely watching the near term support at 5335, 5300 and 5275. If there are any hopeful bulls out there, they will be looking to resistance at 5490, 5615 and 5645.

The near term downward trend sees the index capped by a downward trend line that also puts some resistance at 5450.

Over the longer term, now that the index has broken below both its 200 day moving average and its upward trend line, a close below 5400 could be seen as very negative. We're now in the territory of people not wanting to catch a falling knife.



Stock Markets: 15 May 2012

Greece has a very small economy. To put it in perspective, over the past few years China has seen its quarterly growth remain almost equivalent to the whole Greek economy.

The Greek economy is, approximately, the thirty fifth largest in the world, and one of the smallest in the Eurozone. So why is it causing such complete and utter chaos?

This is purely because so many countries and institutions have lent it so much money over the past decade. If Greece were to default on its debts and leave the Eurozone, it would cause a ripple in one corner of the financial markets that would build into a tsunami. This wave could cause serious damage to other economies.

Those other economies would include the likes of Spain and Italy, where already nervous investors will rush to sell their bonds. This will see yields spike even further, hurting them all the more.

However, larger Eurozone economies won't be immune. France is slowly starting to become a worry because its banking sector has a large exposure to Greece.

It is now becoming increasingly likely that Greece will exit the Eurozone. Unfortunately, such an exit will probably lead to a Greek recession that makes the current austerity plans look like a picnic.

At least, in the long run, they'll have their own currency again, be able to devalue it substantially, and the deeper pain may be shorter lived.

Nevertheless, any Greek exit will also have much wider ramifications, not just for the financial markets, but for the euro project as a whole.

If countries are allowed to enter and exit as they please, it will make a mockery of the single currency and the entire one-size-fits-all venture.

If a Greek government cannot be formed this week, then they will be off to the polls again next month. This is likely to see an even more convoluted result and still fail to provide a government, especially if the extreme parties remain anti-austerity.

Despite the fears over Greece and the Eurozone, the UK 100 spread trading market is on the up this morning.

It is hardly surprising to see some sort of bounce, considering that the index markets have suffered quite heavy losses in recent days.

On the technical analysis side of things, this bounce coincides neatly with the 50% Fibonacci retracement from the August 2011 lows to the March 2012 highs.

Buyers are being tempted back in by this morning's better than expected German GDP figures. These showed that the world's fourth largest economy has avoided a technical recession.

At the time of writing, the UK 100 is bang on 5500 and, judging by the start to today's session, it might just be time for the bulls to win a round.



Stock Markets: 14 May 2012

European markets are in selling mode once again as the political fallout in Greece is knocking confidence across the financial spread trading markets.

The delay in the formation of a government is bringing bond repayment deadlines closer and the lack of a coalition will soon lead to another round of elections. This will simply cause more uncertainty as the anti-austerity party that is causing the deadlock is gaining significantly in the polls.

We have now even seen some central bankers talking about how to deal with a possible Greek exit. This makes it much more likely that the make up of the euro at the end of the year will be very different to the euro we know today.

In fact, many investors have been preparing for an exit for some time now. For them, what's happening now is just the beginning of the end of Greece's euro membership.

On top of this, the Germans went to the polls at the weekend and gave Chancellor Merkel a slap on the wrist in an anti-austerity vote. Worryingly for her, this is a warning shot across the bows for her re-election bid in 18 months time.

In order to appeal to her electorate, she will probably have to take a less aggressive stance when it comes to austerity. This will play right into the hands of the newly elected French President who meets Merkel later on this week.

Unfortunately, letting profligate European governments go on spending sprees will only serve to destroy all the hard work that's been done so far to try and balance the books.

The FTSE had only been called to open lower by some 50 points but it has actually broken below the 5500 level.

We are currently seeing a sea of red across the UK shares markets, with banking stocks feeling the brunt of the selling.

The weakness is attracting some buyers, who had been used to seeing the FTSE bounce after any declines. This time the bounce doesn't seem to be forthcoming.

As a result we're ticking back towards last week's lows of the year. We have also failed to bounce off the 200 day moving average which doesn't bode well for the bulls either.

With so much negative sentiment surrounding Greece, there seems to be few investors willing to buy at these levels.


By Simon Denham, 25 May 2012


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