Portuguese downgrade fails to put off bulls

The prospect of positive earnings reports from the US helped equity markets start the week in positive territory where they left off from the previous market close.

Even a downgrade of Portugal by Moody's, the credit ratings agency, failed to dampen spirits as markets surged higher on the back of market chatter that German banks were on track to pass the European stress tests.

BP led the London market higher as hopes that the ill-fated Macondo Well would be finally capped. The shares topped 400p for the first time since early June; boosted also by possible bid speculation from its North American competitors Exxon Mobil and Chevron. The British oil company has spent the past weeks defending itself from such hostile approaches and may be considering disposal of some of its assets in Alaska as well as some in Latin America. However, the passing of a bill by American politicians could effectively ban BP from any new drilling in US waters for seven years; while BP has not been named specifically, it is certain to be affected should the draft legislation be passed into law.

Chip giant Intel Corp reports of a record high second quarter net income of $2.9 billion on Tuesday evening seemed to advocate the old adage of "buy the rumour, sell the fact" as it preceded the not altogether surprising profit taking that seemed to be the order of the day on Wednesday.

The pause in upward momentum was also prompted by the second successive monthly fall in US retail sales which saw a fall of 0.5% in June, five times worse than analysts' expectations. The down-beat assessment over the pace of the US recovery by the Federal Open Market Committee (FOMC) also contrived to undermine any recent positive sentiment; this was further dampened by the slightly lower pace of second quarter growth from China, as monetary tightening measures have started to filter through to the Chinese economy. Although the banking sector perked up momentarily after the publication of JP Morgan's results, which blew away expectations by posting €3.7bn profits for Q2, the respite seemed brief as a swathe of economic data from the US punctured the possibility of a move back into positive territory on a global scale.

Currencies

The euro continues to gain on the back of declining US yields and a successful 15-year Spanish bond auction, which coming as it has on the back of successful auctions from Greece, Italy and Portugal has contrived to boost risk appetite with respect to the southern European economies.

Overcoming the oft-tested resistance of €1.275 and reaching a new high, at time of writing of €1.2913 against the dollar, the euro looks set to target the inverse head and shoulders price target objective around €1.32.

The single currency continues to struggle against sterling near the £0.84 level and while this resistance holds the bearish scenario remains intact. However, this may not last. Breakage of this key level may well see a new target around £0.8575. If unbroken the euro should continue to find support around the £0.832-£0.833 area, a break of which would target £0.825.

Gold continues to gain as US dollar weakens

Gold has continued to remain solid on the back of Wednesday's FOMC minutes which showed that US officials are starting to have concerns over the pace of recovery in the US economy.

Investor concerns that the US could well embark on further stimulus measures later this year have shifted the focus away from where we were at the beginning of 2010, where a potential rise in US rates was on the horizon, as the withdrawal of stimulus was mooted, and a shift higher in the discount rate in February served to boost the dollar.

Gold had been moving in lock step with the rising US dollar as sovereign debt fears around Europe weighed on the markets and capital flowed into both the dollar and gold. Now though as the dollar starts to slip back gold has started to resume its historical relationship with the greenback where declines in the dollar are reflected in rises in the gold price.

For the last 18 months since the lows of $642 in late 2008, gold has been on a streak as investors seek a safe haven, in the face of massive money printing by governments around the world.

Last week's very brief decline below $1,200 on the back of a story about a gold swap by the Bank of International Settlements and an unnamed bank, showed that there is fairly good demand for the yellow metal at lower levels, and may indicate that the recent moves higher seem to show a decent degree of momentum.

Given the current environment the yellow metal looks capable of continuing to build on its gains of the last few months, and could head towards $1,300 in the short term.

Brenda Kelly and Michael Hewson of CMC Markets www.cmcmarkets.ie