London Open Update

Bears takes a breather

Bearish sentiment in the market has receded today and stocks and other risky assets are higher across the board.

We think this is a natural pull-back, or breather, after yesterday’s heavy losses. Some people will be coming into the market and trying to pick up bargains. However, there is a still a lot of event risk out there: the Fed meeting, the ECB meeting, a G-20 and non-farm payrolls on Friday that could dampen sentiment.

Themes:

• Greece is still on everyone’s mind. The confusion over the referendum seems to have been resolved after Papandreou’s Cabinet agreed to it last night. Political brinkmanship or stupidity – we shall have to see. He has a confidence vote on Friday, there has been a change at the head of the military and his majority has slimmed down even more after some resignations from the Socialist Party, which reduces his chance of passing. So there is a good chance that Greece could be without a government by the end of this week. Where does that leave last week’s EU summit? Will Greece receive its next tranche of bailout funds due later this month? We still don’t know and this is likely to keep volatility high for the next few days.

• We said there was a chance of more emergency summits, well today there is an emergency meeting in Cannes ahead of the G20. Merkel and Sarkozy et al are likely to give Papandreou a major talking to, all eyes will be on how that pans out.

• Italy is also jostling for some of the action. Its cabinet is meeting tonight to discuss new measures to avert the financial crisis. Berlusconi looks like he is losing his grip on power, so political crisis in Greece is aggravating issues in Italy, a much larger, more important economy… the snowballing effect continues.

• Then there is the Fed meeting and Bernanke press conference this evening. This can’t be forgotten about. The Fed is likely to remain on hold; however Bernanke may say rates will stay low until the unemployment rate comes down. There is also the chance he may lay the ground work for more QE, especially since the Eurozone crisis looks far from over.

• Eurozone economic data was fairly bleak today – German unemployment edged higher and manufacturing PMI data for the currency bloc remains deep in negative territory. However, EURUSD has managed to sustain a rally. It is losing steam just ahead of 1.3800 – above here 1.3850 comes into view. 1.3750 is good support in the near term.

• Stocks are also higher, however they have given back some early gains and the early morning optimism has lost some of its fervour.

• Italian yields have moderated, after falling from 6.18 to 6.08 they have are creeping back towards 6.11 as I write. The ECB is a big buyer of Italian debt today, according to reports.

• Expect choppy conditions, the morning gains do not mean we are in a risk –on environment, it may have been some normal profit taking. There are fresh Eurozone debt fears and this is likely to weigh on risk appetite for some time. Don’t expect anything to go up or down in a straight line.