Daily Financial Analysis / Simon Denham / 26 May 2009 / Leave a comment

Daily Comment Tuesday 26th May

The markets are trying to make their mind up as to whether North Korea's nuclear test is going to have any serious ramifications that could dampen investor confidence as we flirt with support levels around 4300. Investors are always quick to cover themselves if any geopolitical concerns dominate the headlines and memories of recent woes stick firmly in the mind. It's when the market is on its knees that such situations can compound selling, as with the bursting of the internet boom was hit by the 9/11 attacks and then the preceding bear market was driven largely by the build up to the second Gulf War. Whilst we are nowhere near these levels of tension, so the market is taking the situation in its stride, it's almost natural that selling takes place. Encouragingly, Asian markets commenced weakly, but recovered ground in a show of defiance in the face of adversity.

The activity over the last few days acts as a sharp reminder that whilst we concern ourselves with our own economic and political problems, threats from dissident regimes is still very much apparent. Whilst the US is the global player both economically and politically, they have been hugely weakened over the past few years with bailouts and wars that are costing them dearly. This is one of the first major diplomatic tests that the new President has faced and the world is watching closely to see if the man who was voted in with his message of change can rally global condemnation and put the pressure on. If the latest nuclear test by North Korea wasn't enough, Iran are also testing Obama's resolve by rejecting the opportunity of holding talks on their nuclear enrichment program.

So the markets on the whole are holding up well with the assistance of better than expected German business confidence yesterday, in line German GDP numbers this morning and some European industrial data showing a smaller than expected decline in new industrial orders. There is nothing else out today in the form of economic data, so investors will most likely continue to keep an eye on the geopolitical situation. US futures are indicating a negative start to trading this afternoon as at the time of writing we are calling the Dow to open 27 points lower at 8250, the S & P 500 3.5 lower at 883.5 and the Nasdaq 100 off as much as 11 at 1352. In the meantime, the FTSE and other European indices continue to consolidate at and around the levels we finished off last week.

On the currency front cable is seeing some profit taking creep in as the pair falls back from 1.5945, failing to mark a new 2009 high at the 1.6000 level. The last two weeks has seen sterling rise 3% against the dollar with six daily gains in a row before yesterday's small decline. Momentum seems to have dried up for the time being and the RSI on the daily chart has indicated an overbought market for the last few days, leading to some resistance around the 1.5950 to 1.6000 mark. The dollar is on the front foot this morning with USD/JPY managing to hold onto the 95.00 level after bouncing from 94.00 last week and against the euro it's gained over 100 ticks currently at 1.3890.

The dollar's strength has lead to some quite aggressive profit taking in gold this morning which has rejected $960 since forming a small double top in the hourly chart. $940 is today's the low at the moment and clients have seen this as a buying opportunity, but a run higher will most likely require further dollar weakness which is certainly not the case this morning.

Oil is back below the $60 mark as it too suffers from dollar strength and for now it seems that the bulls may be content with the gains they've enjoyed so far to now. With so much oil sloshing around above the ground and the OPEC meeting this Thursday likely to result in no cut of output, it's hard to see why prices should remain above the $60 mark for so long.