Daily Market Reviews archive
2012-05-22 Daily Market ReviewPost date: 2012-05-22
Financial Market Overview
The world’s stock markets enjoyed a respite yesterday by surging upwards from their yearly lows hit last week following comments emerging from last weekend’s G8 meeting stressing an emphasize on growth-oriented policies to resolve the European debt crisis. However, many analysts consider that this move is just a temporary breather because of the sustained pressure emulating from Greek political uncertainties, especially now that a new election has been scheduled for mid-June. As expected, the G8 meeting concluded with world leaders expressing a clear preference to promote jobs and growth to assist Europe as opposed to the previous austerity approach. In addition, Greece gained good support from world leaders to help it retain its membership of the currency bloc. Of distressing concern, however, was that Germany refused to adjust its influential position on austerity which could make these desirable objectives difficult to achieve in reality. For instance, one prominent source deduced that although words combining ‘growth and austerity’ are more acceptable to the public than those just limited to ‘austerity’, identifying workable policies will be a much harder task.
Whatever the case, quality actions need to be undertaken quickly as Spain intensified the European plight in recent days by issuing a revision of its forecasted 2011 budget deficit from 8.5% to 8.9% of its GDP. Although both Spanish and Italian 10-year debt yields managed to hold their ground yesterday, they are not expected to do so for long as these costs are viewed as untenable. A positive development did occur yesterday that helped alleviate European concerns after the Chinese premier offered assurance that his nation would back policies to enhance growth in both global commodity and share markets.
EUR/USD: After the EURUSD plunged by almost 70 pips early yesterday, as displayed on the chart below, the pair rallied later during the session in unison with the rising European and Stock markets. Many experts were anticipating should a movement anyway after the formation of a double-bottom on the EURUSD chart was created late last week. However, this new resistance of the Euro to further weakness is not as impressive as it looks. This is because the movements of the Dow Jones Index and the EURUSD are closely correlated so that when the former raises so does the latter. Despite the index achieving gains of over 135 points yesterday, the Euro only just about held its own against the USD. When such a break-down in correlation occurs, then this can be caused, as in this case, by the Euro experiencing intense selling pressure, which is contributing to a very strong bearish sentiment. As such, consider selling this pair if its price can achieve a sustain break below 1.2770.
GBP/USD: A supervisory body announced yesterday that it intended to investigate the ability of the Bank of England (BOE) to forecast growth and inflation as many of its recent predictions have been badly off-target. In addition, an assessment will be made about how well the BOE performed during the 2008 financial crisis which forced the UK to nationalize the lending bank, Northern Rock, as well as bailing out two of its largest banks with billions of tax-payer’s funds. The strong bearish bias smothering the GBPUSD at present prevented the pair yesterday from mirroring the rise in the stock markets, as shown on the chart below. With the GBPUSD under sustained downward pressure, look to sell the pair if price achieves a sustained break below 1.5790.
AUD/USD: As the below chart illustrates, the AUD fared better against the USD than most other major currency yesterday by achieving a modest rise of about 60 pips. This performance resulted from the encouraging remarks made yesterday by the Chinese premier who confirmed the willingness of his government to assist international efforts aimed at bolstering growth in both the Stock and Commodity Markets. As Australia’s biggest exporter is its giant neighbor, China, then this news was very supportive to its economic prospects. However, the AUDUSD is still trading a well-developed bearish channel which is growing in strength as denoted by the rising ADX reading displayed at the bottom of the chart below. Consequently, consider opening a new PUT currency option if price plummets beneath 0.9825.
USD/CHF: As the chart below demonstrates, the CHF successfully kept the USD at bay yesterday following encouraging statements released by both the G8 world leaders and the Chinese premier. This result was a welcome relief for the CHF which has suffered an almost 390 pip loss at the hands of the USD since just the start of May. The current bullish trend will almost certainly resume as the safe-haven status of the USD will attract more investors’ attention as the chaos in European continues to unfold. In addition, the economy of Switzerland is struggling as revealed by the recent postings of a spate of disappointing key indicators. With such a strong bullish sentiment in abeyance, look to activate a new PUT currency option with the USDCHF as its underlying asset if price should surge above 0.9410.
The table below shows yesterday’s performance of OptionRally’s Commodity Options. Despite, gold prices achieving modest gains yesterday before retracting and closing at a slight loss, investors are still reluctant to entertain any serious bullish sentiment towards this metal until they are able to more comfortably assess the risks concerning European debt contagion. Yesterday, although gold did receive some support as a safe-haven asset in Europe, it still remains very vulnerable to increasing US dollar strength and weakness in the Euro which substantially reduces its overall attraction to many investors. Despite appreciating in value during the last three consecutive trading days, still look to sell gold as a preference especially if it price achieves a sustain break below $1,588.22 per oz.
Oil prices climbed yesterday after announcements from the Chinese premier increased hopes for a stronger demand for this commodity from the world's second-biggest consumer. However, as the chaos is Europe is still the main driver behind its prices, look to sell oil if its price falls below $91.48 per barrel.
The table below shows yesterday’s performance of some of OptionRally’s main Stock Options. U.S. stocks made a comeback yesterday following both their worst weekly loss in almost one year and Friday’s disastrous unveiling of Facebook’s IPO. After support from JP Morgan managed to sustain the share value of Facebook above its IPO price of $38 on Friday, the withdrawal of this vital backing yesterday caused the social networking company's stock to plummeted by about 10% to $34.21. In contrast, other well-known technology companies fared much better, such as Apple whose shares appreciated by 5.83% to $561.28.
Yesterday, Yahoo shares climbed by 6% following the announcement of the Alibaba Group to purchase back, for $7.1 billion, almost half of Yahoo’s 40% stockholding in this company. This was an encouraging development for Yahoo after it has recently endured constant criticism from its shareholders for not introducing more positive measures to combat the falls in advertising revenue resulting from competitors’ actions, such as Facebook and Google.
The Stock Markets will have days when it will trade against the prevailing bias such as yesterday because of, perhaps, a good release of an economic indicator release or a supportive headline statement. However, as it is still always best to following the wise adage and swim with the tide, still look to sell Apple if its price falls below $558.91 and Google if its share value drops below $612.31.
The following table presents how some of the major indices finished yesterday:
This Week’s Economic Calendar
Key Events that are market movers: