Utter panic has spread throughout the capital markets, as it now appears that â€śEuropeâ€™sâ€ť problems could very well spread to the rest of the world. Investors concerns remain heightened that credit instability will push business financing costs up, limiting the worldâ€™s economic growth. The result of this â€śdoomsdayâ€ť scenario would a drastic drop in the demand for both goods and services.
Both commodities and stocks tanked last week, falling more than 10% from their highs. Financial stocks were also hit hard, as they are large holders of corporate and sovereign debt, whose prices have declined. In regards to commodities, the CRB Commodity lost over 10% in less than three weeks; while Crude Oil, the leader of the pact, gained nearly $2o from its 2010 high of 87.00.
Even Gold, which rallied on the back of safe haven buying to hit a record high of 1250, was hit hard last week as it stumbled back to the sub-1200 level. Overall, commodity prices will remain under extensive pressure, as excess supply has been dumped into the market at a time when demand has waned.
All of the above has fueled to the Dollar to appreciate against its major currency counterparts as worldwide investors continue to flee to more â€śrisk adverseâ€ť currencies.
Up ahead, investors will want to see if the recent drop in stocks and commodities is based solely on profit taking or whether it is the result of a more long term rotation out of riskier assets. This week, the U.S will report its Consumer Confidence, Durable Goods Orders, and Housing figures. If these numbers are better than expected, it will indicate that last weekâ€™s selloff was overblown and economic growth is taking place.
The Euro rose the most in eight months against the Dollar last week, as rumors circulated that central banks were out buying the currency. The single currencyâ€™s unexpected rise partially fueled by Germanyâ€™s recent legislation to ban naked short selling in select financial stocks and Euro denominated instrument. This â€śbanâ€ť will make it more difficult for traders to sell European securities, thus limiting selling pressure on the Euro.
On Thursday, the Euro jumped a remarkable 1.5% against the USD, its largest five day gain since September â€“ pushing the currency the pair to cross above the 1.2500 mark. This unexpected increase comes only a few days after the single currency plunged to a new four year low of $1.2145.
Currently, it remains unknown whether this rally will continue. In the coming days, traders will want to see other Euro Zone nations join Germany in its recent â€śtrade bansâ€ť.
The pound continues to fall as concerns remain high that the U.K will be unable to handle its massive debt, and that Europeâ€™s financial problems will spread to the British island. Last weekâ€™s higher than expected CPI figure has added to investors concerns. The annual rate of consumer inflation rose 3.7% in April, up from 3.4% in March, and well above market expectations of a 3.5% increase.
The GBP/USD spent most of last week trading below the 1.4500 mark. The pair is currently trading in dangerous waters â€“ any negative news from the U.K could very well push the pair below the 1.4000 figure.
On Tuesday, the U.K Bureau of National Statistics will release the nationâ€™s Revised GDP figure.
Forex traders will want to see if the numbers will be revised higher following positive manufacturing sector numbers, or if the recent rise in inflation has sapped GDP growth.