Further gains expected in oil and gold

Good morning,

• Risk aversion continues to be seen in Europe;

• Investors potentially locking in profit ahead of quarter end;

• Further gains expected in oil and gold;

• Durable goods orders, GDP revision and PMI readings in focus.

European indices are trading deep in negative territory this morning, while US futures are pointing to a slightly higher open, with the S&P up 3 point, the Dow up 17 points and the Nasdaq up 2 points.

The losses in Europe follow similar moves in the US and Asia, where investors have clearly adopted a more risk averse tone recently on fears of further escalations in Iraq. Even yesterday’s stronger consumer and housing data did nothing to lift investors which clearly highlights how concerned they are about the potential for the situation to get much worse before it improves.

I think it’s also worth remembering that we’ve seeing an impressive run in US stocks recently, so this could also simply be a case of profit taking, especially as we’re now approaching the end of the quarter.

In the commodity space, Brent crude prices have eased off slightly, although this is unlikely to last with US intervention looking increasingly likely. This is unlikely to help investor sentiment which has already taken a significant hit in recent weeks. Gold has been one of the biggest winners from all of this, thanks to its role as a safe haven asset. A more dovish stance from the Fed has done prices no harm either, helping keep it above $1,300 over the last few days. It’s currently going through a period of consolidation but I imagine this will only be temporary and as soon as we get a further flare up in Iraq, accompanied by another spike in oil prices, Gold will continue its ascent.

There are a few key economic releases that traders should pay close attention to today. While there may not have been much of a positive reaction in equities to the strong readings yesterday, the dollar certainly benefitted and we could see a similar response today. Durable goods orders for May will be released ahead of the open, as will the third revision of the first quarter GDP figure. Under normal circumstances, both of these could have a significant impact on the markets, so it makes sense to not overlook them today.

Durable goods orders are a good indicator of economic health and people’s confidence in the economy, so can be viewed as both a lagging and leading indicator. People only tend to make these large purchases when they feel the economy is on a strong footing and the future is bright. Today we’re expected orders to be unchanged for last month, which is probably more a reflection of the strength in the data in recent months than the performance in May. First quarter GDP on the other hand is expected to be revised lower again to -1.7%, but I’m not sure how much impact that would actually have on the markets as a poor first quarter is pretty much priced in by now and the second quarter has been much better. After the open we also have the preliminary services PMI and the composite reading, both of which are important leading indicators.