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Is this the beginning of the year end rally?

The optimism shown by Asian markets overnight has only followed through to this morning’s European session to a certain degree as we were calling the FTSE to open up as much as 50-60 points, but we only got a 30 or so point jump on the open.  It’s a gain nonetheless as the tentative buying we’ve seen seems to be putting the bulls in control for now.  The question is whether we are seeing the commencement of a year end bull run or not.  It usually happens in November and December if you look back over time and each year we ask ourselves, will it happen again this time? With all that’s going on in Europe and the doom and gloom about growth prospects not just in the UK, but around the globe, this time might be different and it’s hard to see equities rushing higher in the current circumstance, but you can’t underestimate the resolve of the bulls come year end.

The Dow is usually the one to lead the charge higher and we saw evidence of this again last night.  The return to the 200 moving average on the daily chart has caused the usual expected congestion and pause for thought as bears continue to call the markets’ recovery in the past few weeks a bear market rally.  They are yet to be proved correct as the rush back down again has yet to materialise.  The Dow is back above it’s 200 DMA but the FTSE still has a little way to go. 5700 is the level it needs to overcome in order to get back above here, which for now seems quite a long way off even though we were above there only a couple of weeks ago.

The gains are slowly being eaten away this morning as the buying momentum seems to be drying up with the FTSE drifting below 5600 to 5575 at the time of writing.  Even if a few sellers are creeping in early on it must be demoralising for Italy’s Prime Minister to see that equity markets have held up pretty well considering his announcement to resign.  The bond yields on Italian debt however remain at worrying levels and haven’t quite jumped up to the really critical 7% level yet, seen as the bailout level, so investors are just about giving them the benefit of doubt still.

Nothing to report on the economic data front really apart from some Chinese numbers out overnight which saw inflation dipping a little and retail sales and industrial production holding up well, all coming out in line with expectations.

The euro received a bit of a boost on the back of Berlusconi announcing he’ll step down and the formation of a “caretaker” Greek government which is to take them into the next election.  Traders can expect EUR/JPY to see a continuation of the volatility as the yen has crept higher again in recent days causing the Bank of Japan to mention they will intervene further to make their currency weaker.  The euro is trading lower this morning against the yen at 106.95, breaking below its previous support level, which could signal heading towards 106.50 where it finds its next support level. 

Investors didn’t seem to pay attention to the fact that gold broke the psychologically important level of 1800.0 (not reached since Sept 21st) in yesterday’s session.  The precious metal actually ended the day down 8.7 dollars at 1786.8 after Italy, the newest member of the EU to find itself struggling in the current economic climate, was perceived as being solvent, but having liquidity issues.  Now that the Italian Prime minister Silvio Berlusconi has stepped down, it looks as though investors think there will be less uncertainty and therefore are booking profits in gold, allowing them to dip into riskier assets.

The greenback was out of favour yesterday as risk-on trading was the day’s leader. Traders were in search of higher-yielding assets like equities and commodities, where crude oil is at the top of the list.  Fundamentally, the need for oil in the US slumped recently but on the other hand a decline in supply has been reported bringing support back. Iran was also back on the agenda, threatening to disrupt supplies as a leaked report indicated the International Atomic Energy Agency is about to accuse the Middle Eastern country of running a nuclear weapons program.