Markets take pragmatic approach

Nobody has ever claimed that financial markets were rational, but market action today has deviated from yesterday’s inability to separate conjecture from fact by adopting a more pragmatic approach, focusing on actual economic fundamentals.

European markets

Going into the close, the FTSE is trading up 54 points at 6384 with additional upside momentum being hampered by short-term profit-taking at the previously supportive 6400 level.

Germany’s ZEW survey aided sentiment in the early part of the trading session, rising from 36.4 to 38.5 in June and mildly ahead of expectations. This helped to spur risk appetite during the morning, although the European session remained fairly lacklustre until the afternoon. Nevertheless, the mining sector remains under pressure, hampered by the sell-off in metals and the usual degree of concerns about global growth. All we can do now is wait and see how tomorrow's Fed meeting plays out, with equity investors uncomfortably aware that their fate is not in their own hands at the moment. 

US markets

These wild swings in US equity markets are becoming the norm with the Dow Jones solving ’the case of the missing volatility’ over the past few trading sessions by gyrating wildly by over 100 points in different directions. One can only imagine what tomorrow will bring when we finally get a glance at what to expect from the Fed in terms of monetary policy.

The strong rebound in US housing starts by 6.8% in May was construed as positive and helped US equity indices add gains. While construction in new houses was marginally below the expected 953,000, inflation rose by less than expected. US headline consumer prices rose at an annual pace of 1.4% and 0.1% on a monthly basis versus forecasts at 1.4% and 0.2%, respectively. The Dow is currently trading up 106 points at 15,283.


Gold has failed to catch a break in recent months. Despite the perceived devaluation of the US dollar, markets are clearly more interested in capturing a yield in equity markets. The inflation picture in the US is not playing into the hands of the gold bulls, with the cost of living rising less than forecast in May. Gold prices have now fallen to a one-month low. Tomorrow's Fed statement may well decide the future direction for gold in the medium term. In the short term, the fact that the price remains resolutely below the $1400/oz mark puts the bias firmly in the bear camp.


It might be time for the ECB to wheel out the 'active potential for negative rates' rhetoric. The better-than-expected German economic sentiment numbers along with a frankly impotent attempt from ECB president Mario Draghi to talk down the recent strength have seen the single currency capture a four-month high against the greenback. In light of how the eurozone, and in particular the peripheral countries, are expecting to export their way out of the current recession, there is little doubt that the current trajectory is not conducive.

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