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The release of the worse-than-expected US GDP data for the second quarter and the subsequent rally which ensued has proven this to be nothing more than a fleeting delusion. Dovish rhetoric from both the ECB and outgoing Bank of England governor Mervyn King has also helped the bullish case. The taper on/taper off sentiment is the continued theme and as a result we expect to see additional volatility as the summer progresses. DAX equities put their best foot forward, aided and abetted by improved German consumer confidence and looks now to resume the upward trend that has been in motion since June of last year.
Comparatively, the UK benchmark has underperformed significantly with the mining sector taking a drubbing on weak base and precious metal prices. Polymetal International shaved off 4.29%, while Evraz and Anglo American lost 4% and 3.5% respectively. Aberdeen Asset Management recently saw its share price deteriorate by almost 30% since its highs of 28 May. Investors today saw value in the put-upon stock and have boosted it by over 6%, giving it the top place on the FTSE index.
It’s been a good day for US indices. The S&P 500 has retaken the psychological 1600 level driven by the fact that US GDP in the second quarter was not as stellar as we had been led to believe, with the initial 2.4% revised heavily downwards to 1.8%. Some of this downward revision can be blamed on the weaker export sector which actually contracted by 1.1% in Q1. Given that worries persist in regard to the Chinese credit crunch and Fitch ratings agency reducing their growth outlook for all four BRIC nations, one could expect to see US exports remain under pressure for some time to come.
More importantly, consumer spending, which makes up almost 70% of US growth, failed to meet expectations, coming in at 2.6% rather than the 3.4% consensus. The Dow is currently trading at 14,873, up 108 points on the day.
The dollar index has been on a bull run since 19 June and has taken a marginal breather today upon testing the 83.00 level. This has secured the $1.30 support for the EUR/USD cross for now, but the continued accommodative policy from the European Central Bank might suggest that the level is temporary and a move towards the $1.28 zone in the medium term cannot be ruled out.
Gold, the commodity guaranteed to bring the emotional side out in a trader, has continued with the bloodshed today, falling as low as $1225 per ounce before catching a bounce on the worse-than-expected US GDP number. The precious metal has now plunged 36% from its record high seen in September 2011. One should recall that a similar move took place in March 2008 over a shorter time period as a precursor to the global financial meltdown.
Rising support from the lows of September 2005 would suggest that we may well see a test of $1150/oz, always assuming that the $1200 level doesn’t entice the buyers back in.
West Texas Oil, the other commodity of note today, remains in a sideways trend unable to grip above the $95/bbl level as global growth concerns persist. Inventories remain unchanged from last week, where a surplus of 0.3m barrels was reported from the EIA.