Blind Faith?
25-10-2011
Investors continue to show optimism on the surface as the EUR, GBP, AUD, and equity markets have continued to rally. Risk appetite has shown the ability to sustain itself for nearly two weeks now as the E.U. has stabilized for the moment, sentiment that has been extremely fragile among investors. The question that must be asked is if the E.U. will be actually able to deliver fundamental reforms that will create a solid base for its troubled financial institutions tomorrow when the clock supposedly hits midnight? The Europeans have promised that they will outline a package that will answer the questions that exists about banking liquidity, but rumors continue to emerge that the banks themselves are not exactly seeing ‘eye to eye’ with current proposals as they stand. Thus another question that must be asked is what the market fallout could be if investors come to the conclusion that it was merely blind faith that led to the past two weeks of trading?
Flash PMI data from Germany and France via the Manufacturing and Services sectors was convincingly disappointing. The readings showed that Europe stands on the precipice of an economic contraction. Today the U.S. will see the CB Consumer Sentiment marks. And while investors have been pointing towards the bailout package that will come from Europe tomorrow and supposedly more stable economic numbers from the States, plenty of signs persists that problems still lurk and may actually come back to strike fear again in the hearts of investors. In other words there are concerns that this recent rally will eventually erode because economic conditions are not better.
Reports from the E.U. will continue to be monitored closely today and tomorrow. Rumors and developments are running rampant and traders will have to be alert to any seismic changes in the landscape that are liable to erupt. The Forex markets have essentially continued to take on risk as stability has been factored into the waters, but tests will certainly come for these short term highs and they might come sooner than anticipated. It will be interesting to see what happens to the broad markets particularly among the equity bourses as Tuesday develops. Commodity prices also continue to push forward and Crude Oil has kept pace. At some point investors will begin to ask what demand is once again for the physical resources. Gold as of this morning is around 1655.00 USD which remains a consolidated value for the precious metal. Over the next two days Gold could become swift as European developments via the summit become clear.
The JPY has pushed to record high values against the Greenback, it has not been a huge move, but the Japanese currency continues to inch incrementally stronger against the USD. This has taken place as the BoJ continues to whisper that a possible intervention is being considered in order to weaken the JPY.
Critical news will come via the E.U. within the next thirty hours and investors should be braced for its repercussions. Positions should be taken with careful consideration that the broad markets are likely to become suddenly swift.
