Best first quarter in 12 years for equities

With the notable exception of the news from Ireland, last week was relatively quiet in international financial markets. Wednesday, however, marked the end of the first quarter of 2010 and there has been plenty of news to look back on.

Equity markets have had another excellent quarter, with the S&P 500 gaining 4.9%, the FTSE 100 up 5.3% and the Iseq up 6.6%. This is the fourth consecutive quarter of gains, and in the case of the S&P, it was its best first quarter in 12 years. Investors are upbeat at the moment and despite some sharp spikes in volatility in January and February, there has been a significant reduction in fear. The current level of the Vix (volatility index) is close to that of 2005 to 2007 levels, or "the good old days".

From a European perspective, Greece's debt crisis has been the biggest issue facing investors this quarter. The problems in Greece were a major contributor to the 6% fall in the EUR/USD since 31 December, and despite the recent accord reached between France and Germany, the Greek problem is not likely to go away in a hurry. Last week alone, the yield on Greek 10-year debt has risen more than 25 basis points.

International confidence in the eurozone is low, and there is a growing fear that the problems in Greece are just the tip of the iceberg within the monetary union.

At the same time, however, international sentiment towards Ireland has been warming. This is shown by the reduction in the yield we pay on 10-year debt, which has fallen from 4.9% to 4.4% in the past three months.

We don't usually spend much time talking about the Irish markets, but given the week we've just had it's hard not to mention them. As noted above, Irish equities have rallied 6.6% this quarter, and a massive 10% this month. While many things in Ireland may seem desperate at the moment, the market is somewhat removed from the day-to-day dreariness, and it still offers enormous potential for traders.

We will not attempt to critique the latest news on the banks but instead highlight the extraordinary moves that have taken place recently. As a trader you don't necessarily care what the best option for the government is; instead you try to work out what it will do and how that will affect share prices.

In Ireland, market-related news tends to leak, and AIB's significant decline on Monday, trading down 18%, was a perfect example of this. The minister's announcement after the market close on Tuesday confirmed that AIB was going to suffer a bigger haircut on its Nama assets than envisaged.

While AIB was mostly flat for the rest of the week – albeit with some sizable intraday moves – Bank of Ireland's share price was buoyed by the fact that it was unlikely to need any more government funds to shore up its balance sheet. On Wednesday BOI's share price rallied 23%.

Due to regulatory restrictions you still cannot short the Irish banks. However, as you can see from the past three days, there are still plenty of opportunities for short-term trading on the long side.

Oil breaks key levels; wheat hits new lows

After a lot of indecision two weeks ago, the oil market surged higher last week after breaking a short-term resistance level at $82/bbl. However, the key for a substantial move higher is a break above the previous year high at $84.

At the time of writing US light crude was trading at $84.70, so it seems apparent that this level has been broken. However, traders should have been looking for a close above this level by the end of the week to confirm the break; $89/bbl is the next strong level of resistance with $86/bbl a notable level along the way. On the flipside, if the market can't hold up at these levels, it could fall back to $80 quite quickly.

From a fundamental perspective, the equity markets continued to rally and the dollar also weakened a little, which has boosted oil prices. Maybe more significantly, there has been positive economic data from China, which posted higher than expected manufacturing figures.

Also making significant moves was wheat. It broke a key support level at 4,640 on Wednesday and continued to fall to a low of 4,505. The target from a technical perspective is 4,400. This level should be very tough to break as it represents a low not seen since September 2009, and March 2007 before that.

Finally, metal prices moved higher last week, with gold rising more than 1.5% and silver, surprisingly, rising more than 5% on some dollar weakness. The technical picture on gold shows a downtrend since last December, but this is now very close to breaking.

With the market currently trading at $1,127, a move above $1,132 would suggest the downtrend has been broken and the market would then be trading in a range. Price action in the yellow metal should be monitored very closely over the next few days.

Paddy Haran and Vinay Sharma, Delta Index