As feared yesterday we witnessed a sharp bout of profit taking in the equity markets as investors took the opportunity to lock in their profits after a 5% rally last week.
The move may have been catalysed by the fact that several large US banks were looking to use common equity issuance to raise funds in order to repay borrowings from the Government. In addition Ben Bernanke then seemed to put a short term top on the market surge by focusing on the dangers of inflation and the timing of an increase in interest rates by the Federal Reserve. HSBC also released results that although in line with expectations, failed to impress the markets. The knock on effect in the currency markets was a swing back into the USD and YEN and selling pressure on all the higher yielding currencies especially the AUD and the ZAR. In late afternoon the equity markets did stage a slight recovery and this demonstrates good underlying sentiment which could lead to further gains going forward in equities.
This view was echoed by Mr Soros who stated that “the economic freefall had been stopped”, in fact there was a plethora of declarations of recovery yesterday…Deutsche Banks George Buckley indicated that the UK output could grow again by June. In addition the Organisation For Economic Cop-operation and Development (OECD) said Britain was one of the countries showing “tentative signs” of a pause in the pace of decline – the OECD generally has a good record of identifying turning points. Other sterling positive news came in the form of the RICS house price index improvement to -59.9% in April from -72.1% in March and BRC retail sales showing the largest year-on-year rise for 3 years at +4.6%
The pound has gained to 1.52 against the dollar and is also making gains against the euro in early trading…the currency markets continue to be equity driven and with confidence increasing look for more selling pressure on the dollar and the Yen and gains in sterling and commodity currencies such as the AUD and ZAR.
Report by Phil McHugh, Corporate Foreign Exchange
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