Equities go high but fail to hold gains

It was a quiet start to the week with most of the European equity markets closed for Easter Monday.

However, on Tuesday, traders returned to their desks, invigorated after the long weekend and started bidding up the equities, pushing European prices to 18-month highs.

The US employment figures, which were released on Good Friday, showed that it had added 162,000 people to the workforce in March. While this figure was slightly less than analysts had forecast, the market took the news as a positive. However, the rally was short lived and as the week progressed the equities markets started to retreat.

The ongoing debt crisis in Greece, which readers of this piece may be getting slightly tired of at this stage, has once again dominated headlines.

After the accord reached in the EU a few weeks ago on the Greek situation, some believed that the story might go away for a while, but this clearly failed to materialise, and actually, the pressures on Greece have rapidly increased.

The word on the street is that the agreement may be unravelling, and this is shaking confidence severely. Thus far, non-Greek equity markets mostly have brushed off the problems in Greece, but with the crisis fast approaching crunch time, anxiety amongst the global investment community has now fed into equities markets.

The heightened nervousness has been more pronounced in the capital markets.

The price of insuring against Greek government default, using credit default swaps, is at a record high and the spread between Greek 10-year bonds and the German bund is now at 425 basis points, its highest level since the euro's inception.

The cost of two-year debt has raised to almost 8%, up from 5% at the start of the week, a harsh reality to face given the fact that the ECB base rate is at a record low of 0.5%. All of this means that it is very unlikely that Greece will be willing to raise the funds it requires at such enormous cost, and an intervention from the EU and/or the IMF will be needed very shortly.

The crisis in Greece has had a negative impact on the value of the euro, and the US dollar is in turn enjoying a strong week. The dollar index is trading 50 points higher this week, and the EUR-USD is down 1.25%. The dollar is benefiting from its "safe haven" status as investors transfer their cash into dollars against the backdrop of the aforementioned worries infecting the eurozone and resulting risk aversion.

While the above all sounds quite alarmist, the more nonchalant investor may dismiss the latest fall in equities prices as a short-term reaction to an overbought market, and this may well be an accurate analysis.

The belief is that the bulls have temporarily run of steam, are taking a short break, and even taking some profits off the table.

After making such tremendous gains, this would hardly come as a shock.

Oil breaks above key levels but sinks back

Last week we identified $84/bbl as a key level for US light crude oil, and after it managed to hold above that level last week, the break was confirmed.

Oil quickly traded up to our next level of $86/bbl and even reached $87/bbl during the week.

However, a strengthening US dollar, on the back of news from Greece and growing risk-aversion amongst investors, put some downward pressure on oil prices.

As we write, US light crude is trading just above $85/bbl. If oil manages to hold above $84/bbl then the next major level as identified last week is still $89/bbl. The commodity is now trading more than 70% higher than it was this time last year, but is still a massive 40% off its 2008 highs.

Another commodity which has exhibited similar gains over the same timeframe is copper. It hit a 21-month high this week and is currently trading at $355/lb, roughly 76% higher than it was 12 months ago. It, however, is trading only 11% lower than all time highs.

The astronomic rise in the price of the metal has come in spite of lacklustre supply and demand fundamentals.

A report last week from the metals analysts GFMS said that there was a supply surplus of 777,000 tonnes of copper in 2009, 412,000 more than had previously been predicted by the International Copper Study Group (ICSG).

The ICSG noted that in 2009 the world refined-copper output increased while demand fell. These latest figures, and the stronger dollar, have pulled copper back slightly from its highs, but we must remember that prices are forward looking and the main concern for investors will be the strength of the global economic recovery in 2010 and 2011.

Paddy Haran, Delta Index