Crucial decisions await markets

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Global securities markets rallied in expectation of positive outcome of this week’s crucial events; the German constitutional court’s ruling on the legality of the EU bailout fund, elections in Euro-skeptic Netherlands, details in ECB bail-out package and whether FED will initiate further monetary easing. Dow Jones climbed to its highest level since 2007, and Asian shares followed suit. Asian stocks rose to three-week highs on stimulus expectations supported by a statement from the Chinese Premier Wen Jiabao that China is on track to meet this year’s target for economic growth.

The USD came under new pressure after the international rating agency, Moody’s, threatened to downgrade US if the world’s biggest economy do not produce policies to cut its debt. The dollar index, DXY, towards several other currencies reached a four-month low. Euro/USD jumped to 1.2872 on hopes that the constitutional court will rule in favor of Germany automatically participating in the European Stability Mechanism (ESM) and other bail-out arrangements. The Australian dollar which is highly sensitive to development in China, climbed to a three week high of 1.0474.

Commodities and oil prices are also living high on stimulus expectations. A weaker dollar continued to underpin most dollar-based commodities. Brent crude rose to USD 115,43 and NYMEX, traded above 97. Gold has fully recovered from the drop on Monday and is back on 1735. During trading on Friday Gold reached 1741 which is the highest level since February. Silver is at 33,60. Copper is up the fourth day in row.

The new records in the equity markets have been reached on the basis of much smaller than usual volumes. Among investors there is therefore a growing feeling that markets might have run, too, quickly based on monetary expectations without roots in economic fundamentals. Regardless of the outcome of this week’s crucial events we might therefore be in for a rather strong technical correction. The forthcoming US elections which traditionally give a boost to stock markets are also an uncertain factor. In the currency market the sentiment seems for the moment clearly in favor of the Euro. Japanese yen reappears as a safe haven, and precious metals still seem to be a safe bet.

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