Hopes for eurozone deal boost stocks

The euro is at the vanguard of a “risk asset” rally as investors have
one of their more optimistic days with regard to the the eurozone fiscal
crisis.

The FTSE All-World equity index is gaining 0.6 per cent, commodity
prices are mixed, and benchmark Treasury and Bund yields are up several
basis points each as havens lose cachet. Gold is down 0.3 per cent at
$1,654 an ounce, while the dollar index, which traditionally sports an
inverse correlation to risk appetite, is down 0.6 per cent.

The single currency is up 0.6 per cent to $1.3814, and has hit a near 6-month high versus the Swiss franc, with traders betting that this weekend’s European Union summit will deliver a comprehensive package to tackle fears of sovereign debt contagion within the bloc, and possibly beyond.

If realised, such action could salve one of the market’s major irritants and reduce fears that an already weak global economy would be further damaged by a collapse in confidence as the European financial system quakes. The challenges facing the eurozone will be seen in Greece as the country suffers a 48-hour anti-austerity strike.

But joy is not unconfined. Investors are having to deal with another decidedly mixed batch of US earnings reports after Intel provided better than expected results, Morgan Stanley marginally beat expectations but Apple delivered a rare disappointment.

Apple’s shares – the most heavily weighted in the S&P 500 index – have tumbled 5.3 per cent after the tech group blamed weak iPhone sales for its earnings miss, having beaten forecasts in every quarter since 2004.

Still,New York’s S&P 500 has opened only fractionally lower on Wednesday, helped by news that US housing starts rose at their fastest annual pace in 17 months. The gain adds to the 2 per cent advance seen in the previous session.

Part of that bounce was predicated on a report from the UK’s The Guardian newspaper – firmly denied by EU officials – that Germany and France had struck a deal to backstop an expansion of the European bail-out fund, and to recapitalise Europe’s banks. The report sparked a brief buying frenzy, and illustrates how traders remain slaves to any eurozone headline.

Less positive news came from Moody’s, as the rating agency followed a move by S&P last week to deliver another downgrade of Spain’s sovereign credit. Indeed signs of stress remain in the region’s sovereign bond sector. The spread between French and German 10-year bonds has risen to a fresh 19-year record of 115 basis points as concerns grow about the damage to Paris’s finances should it help recapitalise the country’s banks.

European equities are shrugging off these developments, however, and are being powered by Wall Street’s strong close and a 0.9 per cent advance for the Asia-Pacific region – though it is noticeable that Shanghai has again failed to join the party, dipping 0.3 per cent as concerns about financials continue to weigh. The FTSE Eurofirst 300 is up 0.4 per cent as banks and resource groups see buyers.

The commodity complex is mixed, with industrials weaker but agriculturals mainly firmer. Copper is up 0.1 per cent to $3.36 a pound, but Brent crude is lower by 0.1 per cent to $111.05 a barrel. Corn and wheat are both gaining about 1 per cent.

Trading Post.

For equity investors the action on Wall Street at the start of the week will have delivered a queasy feeling of déjà vu.

It’s a trader’s market – buy and hold investors have been moving to
the sidelines, chastened wrecks – so these technical factors
carry weight.

Three times the US benchmark had looked like breaching the top of that range – only to fail.

Another attempt was made on Monday. Out of hours futures at one point
suggested the S&P would open at 1,235 but soft earnings and a
paring of eurozone “optimism” provided the perfect excuse for
top-of-the-range profit-taking.

At the open on Tuesday, the S&P was again flirting with support
at 1,200. The rally which followed reclaimed all of Monday’s loss and
left the S&P once gain within several points of 1,230.

The bounce appeared to be based on residual hopes that the US economy
is not as bad as feared – following some relatively upbeat housebuilder
sentiment data – and a generally positive take on a fairly mixed batch
of earnings.

Building optimism that the eurozone authorities were getting their
act together also played a part through the session. However, it would
be false to suggest the day’s rally was solely based on The Guardian’s
report of a huge expansion of the European Financial Stability Facility.
The S&P was already up about 17 points before the report hit the
wires and it added 8 more points after the news broke.

Now, on Wednesday, the S&P is again within several points of 1,230.

Perhaps the big question for bulls is, did Monday’s pullback
represent a consolidation, which has been swiftly reversed and thus
signals the start of the next leg higher? Or is it merely another bear
market rally? The Vix stubbornly above 30 indicates a degree of
nervousness that suggests the latter.