Equities remain resilient as Dow falls short of 20k

With the Dow within touching distance of the 20,000 level and the German DAX posting its highest levels this year it’s increasingly becoming obvious that even a rise in geopolitical tension over the past couple of days doesn’t appear to be worrying investors too much as the markets indulge in a bit of Christmas spirit as we head towards the holiday break.

Yesterday’s move in the FTSE100 to its highest levels since mid-October were primarily driven by a weak pound, a rebound in oil prices and a decent rally in the banking sector, which to all intents and purposes has had a decent year, despite concerns about the low interest rate environment.

Much of this rebound in the banking sector has come in the last three to four months as it became apparent that the economy was doing pretty well and the Bank of England would be unable to cut rates any further, while the rise in inflation expectations started to push yields higher, and take the pressure off stressed balance sheets.

Even travel and airline sector stocks, which have struggled in Europe this year due to terrorism concerns didn’t fare that badly, which was somewhat surprising given the events in Berlin and Turkey, though in the case of Turkey, its allure as a travel destination has already been affected by previous terror concerns.

In Italy it is looking increasingly likely that the €5bn private sector bailout for Monte dei Paschi will fail, as the government prepares a €20bn rescue fund for all the vulnerable banks in the sector. As of yesterday only €200m had been committed which suggests that investors aren’t exactly falling over themselves to get involved.

Whatever happens in the next few days whatever plan is implemented won’t resolve the underlying problem in Italy, which is it has too many banks and too much bad debt, across the entire sector.

The pound had a difficult day yesterday despite some fairly decent retail sales data from the CBI, which came in at its highest level since September 2015, and its highest level this year at 35, boosted by sales of clothing as well as groceries.

Today we have the latest UK public sector borrowing numbers for November which is expected to come in at £11.6bn. This would be a significant improvement on the numbers this time last year, and could potentially keep the numbers on course to meet its revised target of £68.2bn for this tax year.

EURUSD – the euro continues to look soggy with a new multi-year low as the pressure for a move towards parity continues. To delay this prospect we would need to see a move back through the 1.0520 area towards the 1.0700 area.

GBPUSD – the recent weakness has seen us slip back towards 1.2300 but as long as we remain above this level the odds continue to favour a return to the 1.2500 area. A move below 1.2300 would potentially argue for a move back towards the 1.2100 area. Odds still favour a return towards the highs last week at 1.2670.

EURGBP – appears to be range trading for now with support just above the 200 day MA at 0.8310, which remains a key level. A break below argues for a move towards 0.8230. We need to see a recovery back through 0.8480 to stabilise.

USDJPY – continues to look well supported for a drive higher towards the 120.00 level, while above the 115.60 level. A move back below 115.60 would then suggest a move back towards 114.00.

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