Markets rally despite 'unusual uncertainty'

Equity markets shrugged off the "unusual uncertainty" of US Federal Reserve chairman Ben Bernanke's comments on Wednesday and Thursday as they rallied on a number of factors, focusing on company earnings, and better than expected economic data from Europe and the UK.

Positive sentiment was temporarily knocked by US housing data coming in below expectations, highlighting the precarious state of the US housing market since the expiry of the home-buyers' tax credit.

Closer to home, UK retail sales for June surprised in a positive sense, coming in at 0.7% against an expectation of 0.5%, while May's figures were revised up from 0.6% to 0.8%, raising hopes that UK GDP growth figures could finally surprise to the upside.

Earnings news from Apple was another catalyst to an already buoyant market as the technology giant smashed analyst forecasts with revenues rising 88% to $15.7bn in three months to 26 June, with net quarterly profit up 78% at $3.25bn. Strong consumer demand for the iPhone 4, despite the so-called 'Antennagate', has led Apple to predict revenues of up to $18bn in the current quarter.

By contrast, Nokia's second-quarter profit plunged on what can only have been its failure to bring out a high-end handset that might compete with Apple's iPhone.

Nokia has managed to shave two-thirds off its share price since the inception of Apple's smart phone, and speculation fuelled by calls from both investors and analysts may indicate that a replacement CEO is the only solution to reverse the price slide.

Banking stocks rose on the back of stronger earnings data from Morgan Stanley as well as an expectation that the larger banks should pass Friday's stress tests without too many problems.

Ireland's two biggest banks were on the up as it transpired that they were already in contention to pass the rigorous tests. Bank of Ireland's €2.9bn fundraising last month meant that the threshold set by EU regulators was already met, resulting in a rise from a closing price of €0.65 on Monday to €0.72 at the time of writing.

While also showing an upward trajectory, a shroud of uncertainty remains over AIB as the bank has now only four months to raise €7.4bn in new equity to meet the minimum capital standards laid down by the Financial Regulator in March. The progress of asset disposal – namely that of M&T in the near term – should offer more clues to its future financial strength.

CURRENCIES

EUR-USD: Wednesday's failure to push back towards 1.300 saw the single currency start to slide back, breaking below last week's lows at 1.284, and head lower, overshooting the 1.275-1.276 area, bouncing from lows of 1.2735. A move to the 1.3125 level is eminently possible as the single currency appears to have shrugged off the news that Hungary no longer wants to deal with the IMF from October.

EUR-GBP: The failure to overcome 0.852-0.853 saw an unwinding of some long euro positions and saw the single currency break back below the previous breakout level around the 0.84-0.841 area, touching 0.8378 before rebounding. A move above 0.8440 is needed to stabilise; otherwise we could well be headed back towards the 0.832-0.833 level.

COMMODITIES

Chocolate lovers everywhere could be about to get a rather bitter taste in their mouths if the cost of their favourite treat gets pushed above its recent 20-year highs at $3,500 a ton.

The recent public speculative purchase of 7% of the global supply by hedge fund investor Anthony Ward has prompted a lot of recent volatility in the cocoa price in the short term, as concerns about the recent heavy rains in the Ivory Coast have kept a floor under prices and threaten to push them ever higher.

With warehouse stocks apparently at low levels and speculation abounding across markets that soft commodities will be the next big investment play of the decade, a lot of hot money has poured into what have been historically volatile and thinly traded markets.

However, the high profile of the recent purchase could well prove to be a millstone for the market, and for the fund in question.

Looking at the past 10 years' price action, each time the cocoa price has made a new high the market has corrected about 40% away from these new highs, before resuming its upward momentum. The question now is will the same thing happen again?

While no-one would argue that soft commodities are very supply-driven, the volatility of recent months would suggest that the recent price action could well be corrective.

One of the key tenets of charting is that volume should confirm a move, and last Monday's volume was the second-highest traded turnover on a single day. What this shows is that some nervousness could be creeping into a market that may well be starting to get a little long.

Market participants will be keeping a close eye on the support levels indicated above as to the next move in this rather choppy market.

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