UK Market Comments

A ‘sea of red’ has taken hold of equity indices, with the spectre of the eurozone crisis looming over markets once again.

UK markets

With Portugal looking to be in trouble once again, prudent analysis has been thrown out of the window in preference to a knee-jerk reaction. Portuguese bond yields aren’t soaring (yet), and the contagion hasn't spread to Spain or Italy (yet), but the combination of the news from Lisbon and more data that confirms the weakness of the eurozone has provided the excuse to finally kick start the summer volatility trade into life. Marks & Spencer had a midday slump as the CFO announced he was off to Tesco, in a move that might be described uncharitably as ‘from frying pan to fire’, but overall the shares posted modest gains following their drubbing earlier in the week.

US markets

US indices continue to shake out the weak longs, falling across the board despite a rather buoyant reading on initial jobless claims. A drop to 304K backs up Janet Yellen’s view that the economy is still gradually improving, but this has been forgotten in favour of a renewed focus on Europe after a long break from the crisis that allowed all concerned to put Lisbon, Madrid and Rome to the back of their minds. Still, much of the drop today is down to lower volumes that are magnifying the effect of the eurozone’s worries, and there could be a few red faces around if this move results yet another bear trap. There’s always earnings season, after all.

Commodities

Bad economic data this morning and a fairly dovish Federal Reserve have given gold the strength to finally tear itself away from $1320 today, breezing through the April high. A close above $1340 would be the ideal starting point for a run to $1380, especially if the situation in Portuguese financials spreads to other parts of the eurozone. Ukraine spooked investors, but not for long. Iraq had them worried, but not for long. A recurrence of the eurozone crisis however would really put the cat amongst the pigeons.

FX

Safe havens are in demand in currency markets too, as the seemingly-dormant corpse of the eurozone crisis shudders back into life. The dollar has found buyers after weakening following the Fed minutes yesterday, as the risk-off trade springs back onto the scene. Low volumes and the prospect of more bad news from the eurozone means that the dollar and yen will become the holiday destinations of choice for investors, at least until September when a degree of normality returns.