Investors were more positive yesterday as the German Court confirmed it would give its ruling, sometime today, on the establishment of the European Stability Facility. Hopes of a favourable outcome together with the expectation that the Fed will act to stimulate the US Economy, at its meeting tomorrow, boosted market sentiment. Small business in the US is also doing a bit better according to the survey released yesterday.
The FTSE continues to under perform the other main equity markets after Burberry, the UKs biggest luxury goods maker, warned of disappointing profits in advance of full year results being published. The European markets were also boosted when China’s Premier, Wen Jabao, in a speech to the World Economic Forum in Tanjin, promised that China would boost growth . All eyes will be on the German Constitutional Court ruling on the estabilishment of the ESM. A plausible outcome from the Court will rule that it is legal but limit the amount committed to equal the EFSF. One economist, that I follow, calculates that there is about €250billion of capacity left in the ESRF and the capacity of the new ESM would be about €500billion, so a ‘NO’ decision would cut bailout capacity by €500billion. Spain and Italy could still apply to the ECB’s new program, the ECCL, but would have to move fast. There will be lots of event risk around this decision.
Today, we have UK Unemployment, Industrial Production from the Euro-Zone, Germany will be auctioning 5 Year Bonds and, later in the US, we have Wholesale Inventories.
Sept S&P 500
The S&P continues to find support in the 1420/1425 area. Yesterday it dropped down to my buy zone at 1428 before it rallied to the 1437 level which is the same high as Monday. I took a 6 point profit and I am now flat again. I am concerned that for the second day in a row the market sold off into the close and I think an awful lot of good news is priced into the current market level.
Today I am going to change tack and I will lower my sell zone to 1435/1440 with a 1443 stop. If I am stopped out I will look to resell over 1450. I will still look to buy from 1420/1425 but with a tight 1418 stop.
EURO/USD
The Euro continues to strengthen and I was able to take profit at 1.2840 on my 1.2755 long position and I am now flat. It is very overbought but I still do not want to play the short size until we test the 1.2950/1.3000 area. Today there will be lots of volatility around the Court decision and I will still look to buy in front of 1.2750 with a tight stop.
Dec BUND
The Bund continues to trade heavy and I took a small profit on my 140.35 long at 140.70 and I am now flat. I do not like the fact we broke the 140.10 level and today the fact that we have this 5 Year Bond auction will not help the market. I will look to go short from 140.30/140.60 with a 140.75 stop. If I am taken short I will look to take profit in front of last Fridays low at 139.45.
Sept DAX
I paid the price for not taking my profit on my 7230 short early yesterday and I got stopped out for breakeven on the announcement that the German Court will make a decision today. I then went short again at 7295 and I was stopped out this morning at 7320 and I am now flat. The Dax is extremely overbought and is at the top of the Bollinger Band and Williams Index. I will leave a sell order at 7380 with a 7420 stop. On the other side, 7200 will now be good support and I will look to go long from 7200/7230 with a 7185 stop.
USD/JPY
I was stopped out of my 7840 long at 7810 and I am now flat. I will leave this market alone for the next 24 hours to see how the market reacts to today’s events.
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