Compass Directions - Morning Report

Investors are betting that the 13th European crisis summit in less than 2 years will be lucky 13 and that a plan will be soon announced that will bring Europe back from the brink of financial disaster. Despite Chancellor Merkel constantly hosing down expectations with comments such as “Today, one shouldn't expect decisions” and that the process is “a technically complex process”, the markets bet on positive news and this saw the USD fall against the majors on Friday. Adding further pressure on the USD dollar was more speculation that QE III is imminent. The EUR rose to as high as 1.3902 on Friday before settling this morning at 1.3860.

It is a miracle that markets have held up so well given the deteriorating situation in Greece and the recent warning by S&P that even France may lose its top credit rating. Merkel took aim at Italy over the weekend pointing to the nation's debt which stands at 120% of GDP and stated that a resolution to the current crisis will only emerge if nations cut debt and live within their means. Perhaps investors do not believe that the situation can get any worse but the current rally in markets seems to be initiated by nothing more than hot air. However, to be fair, data in the US including new home sales and consumer confi-dence point to a recovery in the US. As risk aversion eased the AUD surged to as high as 1.0380 before settling at 1.0320 this morning.

A combination of rising optimism over Europe, good economic data and strong third quarter corporate earnings saw the S&P 500 close up 1.1% to 1,238 and above a critical resistance level that has capped the index for much of the past few months. McDonald's rose almost 3% beating profit forecasts while the financial sector gained almost 4%. Earlier in Europe, the DAX surged 3.55% to 5,970.96 while the FTSE rose 1.93% to 5,488.65. Today, we have the high impact release of the Chinese Flash Manufacturing PMI that has the potential put the markets in a tailspin. We also have the release of Australian PPI q/q.

Commodities prices rose as market sentiment continued to improve. WTI Crude rose 1.55% to $87.40 while Brent fell mar-ginally by 0.18% to $109.56. Social unrest in Yemen may initiate another round of popular uprisings in the Middle East and may potentially unsettle crude markets. Precious metals gained with gold higher by 1.44% $1,636 and silver up by 3% to $31.20. Soft commodities were mixed with coffee surging almost 6% while sugar futures fell by more than 1%. Copper rose 5.41% after significant falls over the week. The rise wasn’t enough to erase the falls and the metal finished 5% lower for the week. The CRB index rose 3.40 points to 311.08. Our thoughts go out to the people of Eastern Turkey where an earthquake of 7.2 magnitude has struck with an expected death toll in the thousands.