European markets have shrugged off the downgrade of Italy’s sovereign debt by Standard and Poor’s last night as optimism about a successful conclusion to the on-going troika negotiations gains traction.

The payment of two scheduled bond coupons amounting to €769m has also improved sentiment and allayed concerns of an imminent Greek default, with UK markets heading back towards their recent range highs.

Markets have also shrugged off significant growth forecasts downgrades by the IMF for the US, Europe and the UK, for 2011 and 2012.

The biggest sector gainers have been technology stocks with ARM Holdings higher after a rating upgrade a US broker, while more defensive pharmaceutical stocks have also done well with AstraZeneca and Glaxo also performing well, which seem to suggest that while risk appetite has improved, there still remains some caution with respect to a more defensive stance amongst investors.

Another gainer has been US based Carnival Cruise Lines which bucked expectations of Q3 earnings of $1.62c a share to come in at $1.69c a share, boosted by higher ticket prices which helped offset higher fuel costs.

The company has downgraded its full year earnings guidance which could well temper the advances in the coming days.

GlaxoSmithKline is also a good performer on the day, as more defensive shares do well, while retailers are also performing well with luxury fashion retailer Burberry one of the stand out gainers.

On the downside British Airways owner International Consolidated Airlines is the dud of the day, down after international peer Lufthansa cut its full year profit target citing a slump in forward bookings.

US markets opened higher this morning ahead of the start of the two day FOMC meeting.

In earnings news cruise ship owner Carnival announced better than expected Q3 earnings of $1.69c a share up from last year’s equivalent of $1.62c a share.

Adobe Systems is also due to report Q3 earnings of $0.54c which is expected to be unchanged from the same period last year.

Also due after market close is Oracle Q1 earnings with expectations of $0.47c a share up from the $0.42c a share from a year earlier.

Economic data was a mixed bag with housing starts for August sliding 5%, well above expectations of a fall of 2.3%, while building permits jumped 3%.

Despite Italian bond yields continuing to rise, in the face of continued ECB buying the single currency has rebounded after initially falling on the back of the Italian downgrade.

Markets remain hopeful that tonight’s troika conference call with Greece will result in some form of agreement, while the completion of the latest coupon payment has allayed concerns of an immediate default, and pushing the euro back towards the Friday close around 1.3770.

The biggest faller on the day has been the Swiss franc after some disappointing trade numbers for August, which showed that the recent rise in the Swiss franc had eroded the current account surplus from Sfr2.81bn in July to a much smaller Sfr0.81bn, while a rumour wept the market that the Swiss National Bank was going to increase the peg in EUR/CHF up to 1.2500.

Copper prices have remained somewhat bogged down despite a recovery in equity prices today.

Gold prices have rebounded from yesterday’s lows around $1,765 as concerns about Europe continue to dog sentiment.

Oil prices have bounced back from their recent lows as equity markets have rebounded and on the back of some US dollar weakness ahead of the start of the FOMC meeting this afternoon which will be concluded tomorrow.

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CFDs trading update from Michael Hewson, Market Analyst, CMC Markets.

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European Central Bank head Jean-Claude Trichet reduced bond purchases to €14.3bn from €22bn after its buying provided well needed relief to Italian and Spanish yields.

As borrowing costs for Italy and Spain soared to unsustainable highs earlier this month the ECB reactivated its controversial bond-buying programme. This has been successful so far, as Italian and Spanish bonds have fallen back to around 5% from above 6% previously and before ECB intervention.

Unfortunately this is not the case throughout the Eurozone, as yesterday saw Cyprus bond prices sore to 7% on €23.1m worth of 10-year bonds, compared to 6.25 per cent at a similar auction in June.

Officials in Cyprus reacted by declaring it would consider additional austerity measures with a two-point increase in sales tax, a three per cent contribution from civil servants’ salaries and additional tax for high earners.

Continuing on the European theme and fresh concerns for Greece after ratings agency Moody’s said demands for collateral from some of the states providing rescue funds could put its bailout at risk.

Greece agreed last week to provide AAA-rated Finland with cash collateral for its loans to Athens, in a bilateral agreement that sparked requests for similar treatment from Austria, the Netherlands and Slovakia.

Moody’s became the first rating agency to warn that the row over collateral could scupper payouts to Greece, saying a proliferation of such deals would be credit-negative for a nation it currently rates at Ca, just one notch above default.

Meanwhile the price of gold continues to rise and hit the $1,900 an ounce mark for the first time.

The main driver behind this is growing concern about the global economic recovery and the expectation of further increase of the supply of dollars by the US Federal Reserve. The commodity rose nearly 1% to $1,913.50 an ounce over night but then gave back these gains, as confidence returned and stock markets rallied after the open of trading in Europe.

Concerns of a slowdown in the US and the debt crisis in Europe have spurred demand for gold, which is seen as a safe-haven during difficult times. A further driver for this move is rumours that the US Fed may announce a further round of QE in an attempt to boost the slowing economy at the Jackson Hole summit later this week.

We are due several pieces of economic information from the Eurozone this morning with PMI data and the ZEW survey scheduled for release.

It is hard however to be very upbeat over these given the recent surveys and the resulting reaction in equity markets and whilst the Dollar has not been performing too well during the summer, it looks likely to benefit today, along with Sterling, at the Euro’s expense.

Any gains for the Pound might prove short-lived however, with the CBI industrial orders release later this morning expected to show a further decline in activity. Ahead of the UK GDP update later in the week, this might be enough to push the currency back down again.

 
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With the New Zealand economy aligned mainly to food exports, it might seem unfair that the Kiwi dollar has been caned for a global growth scare; but that is the reality.

In a week, it has fallen by nearly 5% against sterling and the yen – not through any shortcomings of New Zealand itself, but because online CFDs investors are scared.

A couple of things worked against all the commodity oriented dollars (the story is the same for the Australian and Canadian currencies); Euroland’s debt crisis worsened as southern Europe was forced to pay more for its borrowings, and the US’ debt crisis remained unresolved by a deeply cynical cross party compromise on reducing the US deficit.

Taken together, they indicate a global economic slowdown and they have provoked a worldwide flight to quality. Everybody wants the Swiss franc and nobody wants equities or global growth related currencies. Investors are so twitchy that sentiment could change at the bat of an eyelid, but it’s not obvious where to look for that change.

 
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Turmoil continued on the markets yesterday as investors around the world fled to the safe havens.

This led the price of Gold to jump above $1,700.00 for the first time in its history. Traders, who once would have jumped into the Greenback for safety, shunned the Dollar as the markets opened following the downgrade of US Debt by S&P.

The Swiss Franc remains the only currency that has been looked as a safe bet despite the Swiss Central Bank doing everything in their power to weaken their currency.

Commodity currencies like the Canadian and Australian Dollars and the South African Rand, which have strengthened over the past 2 years, have all taken hits of 7-9% over the last fortnight. The Dow Jones finished 634 points down.

Sterling has actually remained relatively buoyant over the recent chaos in spite of the UK’s figures continuing to range above and below expectations.

With most of the markets embroiled in the ongoing Eurozone and US problems, the UK has stayed quiet and the long-term plan of both higher taxes and reduced spending to cut the deficit seems to be starting to take effect.

An interesting bit of news out today was that the price of German CDS’s (Credit Default Swaps) rose above that of the UK’s for the first time ever. This is potentially a huge step as Germany has been seen as a rock in the markets despite the fact they are bailing out most of Europe.

If the cost of insuring debt is cheaper in the UK, then the bond markets (which generally are the first sign of change) could be showing the way for a rise in Sterling against the Euro over the coming months.

 
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A horizontal four-cent range ultimately took sterling nowhere last week. It was a net cent lower when London opened yesterday morning only because of an accident of timing.

The week’s Canadian ecostats were inconsequential.

Housing starts slowed in April from an annual rate of 185k to 179k. Canada’s trade surplus widened from $30 million to $630 billion. New motor vehicle sales were up by 2% in March compared with February. The new housing price index was unchanged over those two months.

Investors had no difficulty in containing their excitement.

As with other high-yielding and commodity oriented currencies, the Canadian dollar struggled at the end of the week as market participants worried about the slow motion crash in the Greek government bond market. However, the Loonie suffered less than its antipodean cousins, helped by the gravitational attraction to its big southern neighbour.

Canadian statistics are more plentiful this week than last with manufacturing shipments (sales), international investment flows, wholesale sales and retail sales.

Investors will be particularly interested to see what is going on with inflation; analysts are forecasting the headline rate to be a tick higher at 3.4% while the core rate, excluding food and energy, ticks down to 1.6% . (The equivalent numbers south of the border are 3.2% and 1.3%.)

The GBP/CAD rate has broken below the gently upward-sloping channel that it had followed since early April, but shows no sense of urgency on the downside.

 
CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

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The probability of further ECB interest rate rises in the near term increased yesterday as the Eurozone recorded another slight increase in the (core) cost of living.

Given the hawkish tones (although they were slightly less so at the last meeting) of the ECB, one would expect the Euro to respond positively in the CFD markets on the prospect of higher rates.

However, sentiment remains weak in light of a continuing story regarding the head of the IMF, Dominique Strauss-Kahn, and its potential impact on the ongoing sovereign debt issues.

In his absence EU financial ministers did manage to approve the €78 Billion bail-out of Portugal, the IMF providing around one third of the funds (the other two-thirds are from the 2 bail-out vehicles set up by the EU).

President Obama again called for Congress to approve increasing the debt ceiling to avoid what he described as a potential “devastating economic and financial crisis”. Republicans are aiming for guarantees on deficit reduction before they agree to a hike in the debt ceiling.

The inertia is beginning to worry the markets, given the estimated day that the government runs out of money is the 2nd of August.

The Federal Reserve minutes from their last meeting are due today at 6pm, as ever the markets will be looking for comments on the economic recovery (especially on housing and the labour market). They will also be searching for anything regarding the end of QE2 and the Fed’s strategy once the easing has ended.

Today and tomorrow look set to be very important for Sterling this week with two very important data releases due. The first, UK CPI, has just come in above target, 4.5% year-on-year against a forecast of 4.1% and the Pound is up significantly in early trading.

With the Bank of England minutes due tomorrow, the MPC will be under pressure to indicate when a rate rise is likely to happen, or at least move the tone of the meeting further down the hawkish end of the spectrum.

CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

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A down-up-down move covering five and a half cents left sterling lower by an insignificant one third of a cent on the week when London opened this morning.

The Australian Industry Group’s performance of services index and performance of construction index are akin to Britain’s purchasing managers’ indices, measuring activity in those sectors.

Last week they told a mixed story. Services firms appeared to be pushing ahead, with the index up by five points and in the growth zone at 51.5.

Construction is flagging though. The index was down by another point and a half at 37.9. Building approvals performed strongly in March, up by 9.1% on the month, but were still -18.1% down on the same month last year.

The main impact on the Aussie dollar came from the Reserve Bank of Australia’s monetary policy statement, following its decision to leave interest rates unchanged earlier in the week.

Analysts interpreted the wording of the statement as pointing to an increase next month. Certainly at the time of its release the CFD Trading market grasped onto the higher forecast for inflation and the comment that interest rates would have to go up “at some point”.

This week’s Australian ecostats are restricted to business confidence, the balance of trade and employment.

Of the three, it is the change in employment that is most likely to make waves. Analysts forecast that the Australian economy will have added 17k jobs in April after an increase of 38k in March.

Sterling picked itself up off the bottom last week, but has since fallen nearly all the way back.

 
CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

This content should not be construed in any circumstances as a recommendation or solicitation of any offer to buy or recommendation or offer to sell any security or other financial instrument.

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Risk appetite took a step backwards and the euro dipped slightly.

With Europe re-joining the fray (although not with any real commitment as yet) it doesn’t appear that sentiment re currencies, interest rates or sovereign debt issues has changed one iota.

Trading sessions in the days around the weekend were light in volume and low in movement with thin US markets almost totally on their own for long periods.

We did see commodities and equities ease as a result of a decision from a major futures exchange to increase the margin for trading silver prompting a wave of profit taking in both silver and gold.

This then filtered through to forex trading and, coupled with a comment from ECB President Trichet who said that maintaining a strong Dollar was in the US interest, caused the Greenback to make a bit of a recovery.

Last Friday’s data from the US was on the slightly weaker side of ‘as expected’ with new home sales roughly in line but the Dallas Fed manufacturing index marginally softer.

With the escalation of tensions in the Middle East/North Africa region now encompassing Syria, the Euro has headed back to last week’s highs, with the Dollar again recording fresh lows against the Swiss Franc as oil once again turns higher.

We are scheduled to get several risk events this week that will test the market’s resolve on its bearish stance for the Dollar.

The first of these is the FOMC rate announcement tomorrow afternoon but more important will be the press conference that follows.

Despite growing concern that 1st Qtr GDP in the US will emerge as softer than originally hoped, expectation is that Ben Bernanke will send a clear signal to the market that the current tranche of QE, scheduled to end in June, will finish as planned.

There is currently no reflection of tightening monetary conditions in the forex market so, dependent upon the tone of the Chairman’s comments tomorrow, there appears good potential for a stronger Dollar going forward.

The preliminary estimate of 1st Qtr GDP for the UK is also due tomorrow and this could quite easily be the final nail in the coffin for an imminent tightening by the MPC.

Expectations surround an early guess of a rise of 0.5% for the quarter but recent evidence does suggest that it is the downside that is most vulnerable here. Anything less than this level will be viewed with dismay and leave MPC member Andrew Sentance with little chance of seeing his long demanded hike in interest rates come to fruition.

His term of office finishes at the end of May so the get together on the 5th, will be his last meeting on the committee. He is scheduled to speak today just before 2.00pm and no prizes for guessing what his subject matter will include.

Later in the week we are also due to get both inflation and unemployment data from Germany and the Eurozone, with the outcome of both likely to confirm a further and imminent rise in Euro interest rates.

Plenty of economic data from the US as well with the important consumer confidence number today, housing data on Thursday and the Chicago PMI on Friday. We are then back on the Bank Holiday trail with the wedding induced day off for the UK and Japan also on holiday for their National Day. This will leave the week ending as it began, light on volume.

CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

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US corporate results continue to surprise on the positive side and are in turn fuelling increased risk appetite.

The Dollar accordingly came under renewed pressure with investors again off-loading the Greenback to invest in equities and commodities as well as in the commodity based currencies.

This latter strategy is especially attractive at present with these currencies currently offering a big pick up in yield when compared to that of the US currency.

So, the Aussie reached a post-floatation high at 1.0775 and with the Dollar index hitting a 3-year low.

Elsewhere on the forex markets, both the Euro and Sterling touched 16-month highs at 1.4640 and 1.6517 respectively.

Gold was up again and USD/CHF hit an all time low. One can argue that with ongoing developments in the Eurozone debt market and continued evidence of economic recovery in the US that the spot market has got it wrong but that would be a bit like King Canute trying to turn back the tide. Go with the flow but watch carefully for the turn in sentiment.

In Europe, the 2 debt offerings from Spain and Portugal were better received than had been feared with the former successfully auctioning 10 and 13-year bonds. Admittedly Spain had to pay a higher yield but, on the positive side, it garnered better coverage than at the last similar offering.

Portugal also achieved its desired cash raising, via a 3 and 6-month bill sale, but in this case, not only was demand down but the yield demanded was higher than the last, pre-bail-out, rate. This doesn’t make any real sense and obviously indicates the market’s trepidation over the future path of the country’s financial well-being.

With a further escalation of fears of a Greek debt restructuring as well as concern over the Irish demands for a renegotiation of the terms of its own bail out, the correlation between bond yields of the Eurozone constituent states has become fractured.

Yields on 10-year bonds issued by Greece, Ireland and Portugal are respectively 15%, 10.5% and 9.3% compared to the yield on 10-year German bunds of 3.3%. If the market’s perception was that the current problems were containable then spreads of this magnitude would not exist. Numbers say more than words ever can…

Today we are scheduled to get a breakdown of the March UK retail sales which following the sharp drop in February are expected/hoped to pick up a bit with the possibility of a small positive monthly result.

A German IFO survey is also due this morning which will likely reflect current thinking of reasonably positive current trading conditions but fears for the future. Overall should be a positive backdrop for Sterling/Euro and enable a small recovery in the Pound’s current weakness.

Yesterday, the Riksbank (as expected) raised its official interest rate by 25 basis points and with confirmation that they expect inflationary pressures to pick up, are anticipated to signal a further 4 rises of 0.25% over the rest of the year. This would produce a rate of 2.75% by year-end. The Brazilian policy committee also raised rates but by less than expected, just 0.25% to give a new official rate of 12%.

CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

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Standard & Poor’s cut the outlook on US sovereign debt for the first time ever from stable to negative. They did however retain the current ratings at their highest possible levels of AAA and A-1+.

The adjustment was explained as being a warning to the US that its constantly swelling debt pile was unsustainable and that corrective measures would need to be introduced immediately.

The negative outlook implies that if nothing changes in the next 2 – 2 1/2 years, then an actual downgrade has a 1 in 3 chance of being triggered. It is by no means certain that this will occur, but it should shake up opposing US politicians enough to start the remedial action moving forward.

Suffice to say, the announcement provoked a flight from risk. Equities fell, bond yields rose, commodities came off and with them, the commodity based currencies such as the AUD and CAD. Gold and silver both rose, as did the Swiss Franc and oddly, the US Dollar.

The news is now old and largely irrelevant to today’s trading so we are back to the factors that were affecting the market yesterday morning – Eurozone debt issues, the Libyan situation and Chinese economic policy.

We are still getting mixed messages concerning a possible Greek debt restructuring. Jurgen Stark, an ECB Executive Board member commented that debt restructuring is a very costly process and that it creates more problems than it solves.

An EU source stated that Greece had accepted that a ‘mild’ restructuring of its debt was unavoidable.

ECB President, Trichet, when asked about the subject this morning, fended off the questions saying that Greece should concentrate on applying the aid plan.

Market participants however, remain firmly in the ‘glass half empty’ camp waiting for confirmation of some degree of debt adjustment.

Greece is attempting to raise just over €1 billion today via a short term bill auction. The outcome of the sale will be crucial to market thinking going forward and bond yields are telling the story. The Euro remains vulnerable to developments from the Greek situation.

Sterling has benefited from a less risky perception and as such, a lack of a rate hike in May/June should have little adverse effect on the currency.

The minutes from the Reserve Bank of Australia’s last policy meeting weakened the AUD with current interest rate levels deemed appropriate for the medium term outlook. The minutes also stated that the effects of the severe flooding on GDP would turn out to be more negative than first estimated.

These comments added to downwards pressure on the currency already being exerted by weaker commodity prices.

We have seen strong Eurozone PMI data already this morning which will add to the certainty of a further rise in Euro interest rates. This is likely to happen sooner rather than later, despite the fact that the bulk of positive activity still emanates from Germany.

The Euro is still clinging on to most of this year’s appreciation, but with sentiment beginning to falter, a test of 1.40 on Eurodollar could be on the cards.

Other data today is sparse with US housing starts the only release that catches the eye.

CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

Content by CurrenciesDirect.com. This content should not be construed in any circumstances as a recommendation or solicitation of any offer to buy or recommendation or offer to sell any security or other financial instrument.