Hope for eurozone takes hold

A return to the debt markets for Ireland and lower unemployment figures for Germany were taken as signs that a recovery in the eurozone is beginning to take hold. This gave a boost to sentiment that was felt in both bond and equity markets today.

Optimistic Europe climbs

Fuelled by new optimism, European indices climbed steadily today led by decent gains in the financial sector. Lloyds took the top spot on the FTSE 100, adding 3.48%.

Ireland is continuing its story of boom, bust and bonds; the Dublin government’s bond auction was a roaring success, more than three times oversubscribed, and the golden boy of austerity is making the rest of the PIIGS (Portugal, Italy, Greece and Spain) green with envy.

German unemployment ticked lower for the first time in five months, with those out-of-work falling by 15,000. Retail sales also finally caught up with consumer confidence, rising 1.5% month-on-month in November. 

The rate of inflation in the eurozone dropped and continues to be something of a fly in the ointment with respect to the European Central Bank key mandate for price stability. This may leave the ECB room to cut rates, or at least provide additional liquidity, in a bid to kick-start the sluggish economy in the near future. This potential for additional stimulus is also helping to support equity prices.

The Royal Bank of Scotland is higher following the announcement that the bailed-out bank will cut back on Chicago-area businesses. This is a part of its ongoing asset-stripping programme.

US loses caution

Buoyed by the upbeat European morning session, as well as an improving US trade balance which shrank significantly in November to -$34.25 billion, traders have shrugged off the caution that capped recent equity upside. The three-day losing streak has come to an end as investors become more positive before the upcoming data releases later this week. 

Fears of additional scaling-back of quantitative easing by the Federal Reserve in future meetings have been kicked to the long grass for now as market participants focus on the fundamental rather than liquidity drivers.

The Dow Jones has added 0.75%, with UnitedHealth Group leading the charge. The healthcare company benefited from a broker upgrade and saw gains of 3.3% today.

Netflix has fallen below some key technical levels on the back of a downgrade from Morgan Stanley, seeing losses of 4.5%. One might expect, however, that the cold weather in the US and indeed the UK brings the promise of an upside in revenues for the company as citizens stay indoors.

Dollar surges

Having undergone some loss of momentum following the official nod to Janet Yellen, the dollar surged higher on the back of narrower US trade deficit data at a four-year low. Declining oil imports and record high exports have helped to shrink the balance of trade. This should boost US GDP for the final quarter of 2013, which could well coerce the Fed into embarking on additional scaling back of the current QE programme.

Gold trends to downside

Despite several hedge funds increasing their gold long positions, the better economic data and stronger dollar saw the metal failing  to break above yesterday’s high of $1246/oz. The overall trend is to the downside, although while above the $1180 lows seen late last year there is a propensity to see higher highs in the short term. Increasing economic activity may well lead to inflation over the medium term, but the fading of tail-risks and the better yield to be gleaned in the bond market has tempered the flight-to-safety trade.

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