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Broadgate: Market News 17/8

17 August 2012

European shares set a new 14-month high on Friday and stayed on course to extend gains in the near term as growth-linked stocks were boosted by the launch of a third round of stimulus by the U.S. central bank, fuelling appetite for riskier assets.

The Federal Reserves’ move on Thursday to pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market prompted investors to pile into European cyclical sectors such as basic resources, autos and banks, which generally benefit relatively more from an economic recovery.

The Euro STOXX 50 volatility index fell more than 10 percent to a near 2-month low, pointing to a steep rise in investors’ desire to buy riskier assets such as equities, while charts showed further upside potential for the market.

“We are accumulating good conditions for a recovery in equity prices and things are moving in the right direction,” Dan Morris, global market strategist at JPMorgan Asset Management, which manages $1.3 trillion, said.

“Cyclical sectors, in general, should do well because they are going to both benefit from the liquidity into the system and their inflation hedge qualities. You may well see a bounce in sectors such as materials and energy.”

The FTSEurofirst 300 index ended 1.3 percent higher at 1,120.15 points, a level not seen since July 2011, in volume 153 percent of the 90-day average. It has gained 18 percent since a low in June and is up nearly 12 percent this year.

Miners led sectoral gainers, with the STOXX Europe 600 Basic Resources index surging 6.1 percent, the biggest one-day gain in more than 9 months. Kazakhmys jumped 13.7 percent, while ENRC rose 10.9 percent.

“You are seeing measures which support growth. You still have a valuation differential between the basic resources sector and the rest. Among cyclicals, that’s the catch up trade you want to start playing,” Graham Bishop, equity strategist at Exane BNP Paribas, said, adding that European shares could rise at least 5 percent from the current level by the end of 2012.

According to Thomson Reuters Datastream, the European basic resources index traded at about 10 times its 12-month forward earnings, against 11.7 times for the chemicals sector and 10.6 times for the STOXX Europe 600 index.

Credit Suisse said that cyclicals, house builders and companies which pay high dividends were the best placed to benefit from the of U.S. quantitative easing and prospects for more stimulus by global central banks in coming months.

TECHNICAL PICTURE

The euro zone’s blue chip Euro STOXX 50 index rose 2 percent to 2,594.56 points. Charts pointed to further gains following Friday’s rally.

“We are going to see a further squeeze on the upside. An important level to watch is the March high at 2,611. In the medium term, we will be looking at a congestion area at 2,800,” Lynnden Branigan, technical analyst at Barclays Capital, said.

The next resistance level after the breach of 2,611 would be 2,641, its 61.8 percent Fibonacci retracement of a fall from February to September 2011. On the downside, Thursday’s low of 2,530 could prove to be the first area of support, he said.

Analysts said investors’ focus will soon return to the euro zone problems after the euphoria following the Federal Reserve’s stimulus move faded, but overall sentiment remained positive.

“There are still plenty of things that could upset the upward curve (for shares). We still have to get through the Troika’s report on Greece and are still talking about how the banking regulatory environment is going to be set up. We don’t know if Spain is going to ask for a bailout,” Morris said.

Spain, deflecting pressure to spell out whether it needs more European financial support, said it will set clear deadlines for structural economic reforms by the end of the month, while Greece’s international lenders signalled it may get more time to reach targets under its 130 billion euro rescue package but probably not more money.

Major European stock indexes rode on the stimulus wave, with Germany’s DAX up 1.4 percent, Spain’s IBEX up 2.8 percent and Italy’s FTSE MIB rising 2.3 percent.

The European auto sector raced 3.8 percent higher, construction stocks were up 3.7 percent and banks advanced 2.7 percent.

Commodities

Gold firmed on Monday, holding near its highest level in almost seven months, as the dollar stayed under pressure after the Federal Reserve took bold action to spur the economy.

Gold added $4.93 an ounce to $1,774.39 after rising as high as $1,777.51 on Friday, its highest since late February.

U.S. gold for December rose 0.24 percent to $1,776.90 an ounce.

Currencies

The dollar languished near a seven-month trough versus a basket of major currencies in Asia on Monday, but recovered some ground against a broadly weaker yen, which faces a central bank that could ease monetary policy this week.

The dollar index .DXY stood at 78.878, having fallen as far as 78.601 on Friday, a level not seen since late February. It has shed some 6 percent from a 24-month high of 84.100 in July.

“Investors are likely to continue adding bearish dollar positions. In addition, risky assets including commodities and equities will remain well supported given that the “Bernanke put” is firmly in place,” analysts at BNP Paribas wrote in a report.

They said a slew of Fed speakers this week will likely defend the Fed’s new stimulus program, which could see the bank buy a total of $600 billion of bonds, according to the median forecasts of a Reuters poll.

“With the USD bearish tone gaining momentum, high beta and commodity currencies will be most attractive,” BNP analysts added.

The euro fetched $1.3116, near a four-month peak of $1.3169 set Friday. It has soared nearly 10 percent from a 25-month trough around $1.2042 plumbed in July.

The dramatic bounce in the single currency also reflected relief after the European Central Bank recently announced a long-awaited plan to help lower painfully high borrowing costs for stressed members. Markets are now waiting to see if Spain will ask for help to tackle its debt pile.

Analysts said Madrid appeared to be paving the way for requesting such assistance after it said it would set clear deadlines for structural reforms by month-end.

The greenback, however, recovered most of its recent losses against the yen, rising back to 78.34 from a seven-month trough of 77.13 plumbed on Thursday.

Worried that a strengthening yen could hurt an already struggling export-reliant economy, Japanese authorities last week threatened to intervene to weaken the currency.

The Bank of Japan may also be forced to ease monetary policy at its meeting on Wednesday to counter the Federal Reserve’s latest stimulus measures.

The yen fell to a four-month low against the euro, which bought 102.94, while the Australian dollar reached a three-week high of 83.08.

Against the greenback, the Aussie stood at $1.0536, having scaled a six-month peak of $1.0625 after breaking above its August high of $1.0615.

“Overall, the Australian dollar is likely to remain strong but it’s hard to see it rising above last year’s high of $1.10. A more likely outcome is a range of $0.95 to $1.10,” said Shane Oliver, head of investment strategy at AMP Capital

Source:  Reuters.com

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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