As many people get back to their desk this morning brightly patterned with patches of sunburnt skin, the good weather may be making them feel a bit more optimistic, and the markets are offering a little to sustain the mood. Last week, markets took a tumble as the Germany decided to unilaterally ban short selling certain financial stocks and Eurozone bonds, and this was coupled with regulation passing through congress that would separate deposit taking banks and their speculative arms, as well as make all current bank to bank derivative trades go through exchanges and clearing houses. Not helping was the further worries over European debt, and the panic that it caused sent stock markets down significantly, while also boosting the Dollar and hurting the Pound. However Friday did see some recovery from the week's falls, the S&P500 rose 1.5% and the Euro pushing back up above 1.25 against the Dollar.
The limited recovery could just be a reaction to how much the market fell, with some traders possibly taking profit from shorting the market (while they still can), but it also shows that some of the falls may just be a normal correction after a very strong bull run over the past few months, rather than the start of a 2nd (or 3rd, 4th, or 5th, it depends on when you start counting) wave of panic. There was some good news to give the week a better ending with Germany passing the bailout bill though their parliament, and there was some hope that the Us bill may get watered down slightly during the final negotiation stage. In sharp contrast to the German politicians who have been talking up the risk to the Euro, and the EU, the ECB President has been trying to calm the markets claiming that their is no existential risk. The Pound is still hovering at week levels around 1.4450 against the Dollar, although this represents a recovery from the worst of last weeks lows, and it has also recovered slightly against the Euro to sit around 1.16.
The Pound may have suffered from last weeks volatility, but not as much as the Australian Dollar which slipped down to 0.8073 against the USD, from 0.8850 at the start of the week, which has also allowed the Pound to climb from a low of around 1.62 to push up above 1.74 this morning. The Australian central bank had been expected to continue to raise interest rates later in the year, but the drag on global growth from the Eurozone cut's in government spending has changed the markets view, and some are even pricing in the chance of a 25% cut in the coming months. on the opposite side for the AUD on the global trade flows is the Yen, which has benefited from the rise in risk aversion, forcing the Pound down to below Y130, a level not seen since the start of 2009
It's a quiet start to the week with no data releases of note, although Chancellor Osbourne is about to announce around £6bn of government cuts which will help reassure the markets that the UK government is committed to getting the deficit down, although as the deficit is running at roughly £175bn, the £6bn is barely a scratch on the surface. The Pound looks range bound above 1.44 against the Dollar, and pretty steady around 1.16, so unless Osbourne says something to give the markets a shock, there should be little excitement today.
Posted in Daily Market News on May 30 2014