Another slug of liquidity could be about to be injected into Europe’s damaged banking system, courtesy of the European Central Bank.
The last time the ECB embarked upon a long-term refinancing operation (LTRO) back in December, the result was an impressive rally in European equities and also in the Euro. Of course, the economic and financial conditions were not quite as dire then as they are today. In particular, the ongoing crises in Greece and Spain could limit the effectiveness of any ECB action in the near term.
For the moment, I am treating the strength in the DAX and FTSE as a likely phoney, which will probably culminate in renewed downside. However, the combination of further prospective liquidity and the existing oversoldness in the indices could conceivably make for a powerful rally. I’ll wait until there’s evidence of that before changing my mind, though.
I continue to look for shorts, meanwhile.
Click here for analysis of some leading equity indices.
I do like the look of the latest rally in gold and silver. I have long believed that a larger move in the precious metals would get underway in 2012 and the conditions are looking increasingly favourable. I see further quantitative easing in the US and UK as an odds-on prospect, with Europe likely to pump further liquidity into its damaged financial system before too long too. However, I am not hugely enthused by the outlook for the Euro. So, can gold and silver go higher with a weak Euro/strong dollar?
The accompanying chart shows gold against plotted against the inverted dollar index. Because the dollar is inverted here, it is seen to move in the same direction as gold most of the time. However, I have highlighted two occasions where gold moved higher despite the dollar also strengthening. Ultimately, I see the present crisis as one of paper money than one specifically related to the Euro. The traditional dollar-gold relationship could break down during the next stage of gold’s massive bull market, in my view.
Click here for analysis of some leading commodities.
WALL STREET OUTLOOK
Weak US jobs data on Friday has brought a third bout of quantitative easing in America one step closer, in my view. Once clearer hints about this are forthcoming from the Fed, another sustainable rally in equities should get underway. Buying at times when central-bank easing has been signalled has worked very well since late 2008, and I think next time should be no different.
I am not entirely convinced by the move upwards that we have seen so far on Wall Street. Admittedly, it began with some positive divergence on the daily charts, which is often a feature ahead of significant moves higher. To be on the safe side, however, I want to see more from the US markets before I drop my bearish stance. For now, I am still looking to short reversals.
Click here for analysis of the US markets.
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Dominic Picarda is a Chartered Market Technician and has co-ordinated the IC's trading coverage since 2006. He is a regular speaker at trading and investment events and also holds the Chartered Financial Analyst qualification.