Risk Sentiment Starting to Show Some Life; German IFO Out Today in Europe

By 25 Mar 2011 0 comments

European equities will find some support to close the week on positive risk sentiment the U.S. economy and emerging markets.  This is also being matched by the FTSE 100 index, as futures point toward a rise of 0.7 percent as we begin the final trading day of the week. In macro data, traders will be watching the German IFO data, which will be released at 9:00 GMT.  This will give markets an understanding of the overall business climate in the German economy.  Expectations for this number are suggestive of a positive surprise, at higher levels than were seen before the financial crisis.

Overnight out of Europe, Portugal’s credit rating was downgraded to A- by Fitch, adding that the credit rating could be further reduced.  The Portuguese 2 year bond yield is rising quickly but many analysts are overlooking credit ratings because there doesn’t seem to be much doubt that Portugal will soon receive an economic bailout by other members of the Eurozone.

Commodities are rallying once again, with gold rising to another record high intraday yesterday during the London session.  These types of price increases can create increased volatility as investors start taking profits on earlier positions.

Looking back into earnings reports, we had two important releases from the U.S. yesterday, both in the technology sector. Oracle released its third quarter earnings per share, 0.54 U.S. Dollars against expectations of 0.50 Dollars.  The main source of the added income came with an increase in demand for database software and hardware that was added to the company after its purchase of Sun Microsystems. The markets reacted positively to the beat of expectations and share prices went higher by 2.3 percent.

Research in Motion also came out with its earnings numbers, as fourth quarter earnings per share rose to 1.78 U.S. Dollars against expectations of 1.75 U.S. Dollars from analysts.  The news wasn’t all positive, however, as the company’s growth forecast for first quarter dropped to 1.47-1.55 U.S. Dollars despite expectations of 1.66 Dollars that markets were expecting previously.  The cause cited is an increase in research spending and advertising for the new Play Book tablet.  The Apple tablets are the main competition for this product and with all the buzz surrounding Apple’s products, Research in Motion clearly has an uphill battle in trying to increase its market presence.

Technicals:

We closed our EUR/USD position as prices reached support at 1.4050, for a gain of 110 points.  We are still short GBP/USD but this will be closed soon as prices are currently moving nicely in our direction.  Overnight we opened a short AUD/USD position at 1.0230.  The trade is currently underwater but we will scale into this if the oversold prices are able to move much higher.  But these are essentially all time highs for the Aussie, so we do not see much more upside in this pair.  The profit target is at 0.97.

Gold is back at its all time highs as the rally in commodities continues with its positive momentum.  Support now comes in clearly at 1390, which was also the 38% Fib of the move from 1307.  Resistance overhead is at 1446.  The elevated levels do not present solid risk to reward, so buying dips into support is the best strategy.

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