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Early gains this morning disappeared rapidly as German ZEW figures came in below expectations and modest profit-taking began. This has got a little more strenuous during the afternoon, with the 6700 level now under threat once again.
Upcoming earnings in the mining sector helped steady the ship during the morning but even these gains were not immune from the turn lower as Janet Yellen, head of the Federal Reserve, began her latest testimony. Matters were not helped by US retail sales, which dipped in June, hurting the narrative of an improving US economy.
Imperial Tobacco led the fallers after it confirmed its plans to go shopping in US cigarette brands, but over the longer-term the broadened product base should provide further reason for investors to buy into the rally.
Although the early part of the session saw US markets reach new record highs, the mood didn’t last long. Janet Yellen may have struck a dovish tone but her comments regarding some valuations being overstretched prompted a nervous stabbing of ‘sell’ buttons in financial markets. However, as far as we recall, stock valuations are not in the Fed’s mandate, even if some would like them to be.
Ms Yellen might be warning about bubbles in small caps, but there seems little urgency among policymakers to spook the market rally just yet. Yet again, the fear of upsetting the recovery stalks Ms Yellen’s views – better to risk some higher inflation rather than be castigated as the official that ‘lost’ the recovery. Markets are still adjusting to this view, but when they do the reaction could be significant in terms of equity upside.
Janet Yellen’s testimony, more dovish than expected, has put the kibosh on any attempt by gold to rally today. Indeed, all the meagre gains of the session have been wiped out and the metal is left where it started proceedings today. Each time Ms Yellen speaks she sends a clear signal that gold is not the place to be. Some people keep ignoring her, but their numbers diminish with each appearance.
NYMEX lost the all-important $100 level today, with a drop through the 200-day moving average thrown in for good measure. At this point, a closure of oil terminals in Libya, only recently reopened, might halt the selling but for now the March lows around $97.44 seem reachable.
Fresh highs for the year have been seen in GBP/USD, thanks to UK CPI, while a poor ZEW gave the euro a shove lower.
Janet Yellen’s testimony helped to counter the move in EUR/USD to some extent, being more on the dovish side once again.
However it is EUR/GBP that is becoming more exciting, as the clear divergence between the UK and Europe widens a little more. The box ticking in economic data for the UK continues, with each new milestone bringing us a little bit closer to the long-awaited UK rate hike.