Investors and market commentators are concentrating on the recent data out of the US and China and coming up with doom-laden prognoses. Readers will note that many of the reasons cited for the recent falls were commented on by us well beforehand. While I am not an outright bear on the economy, this does not mean that investors fear will not drive the markets further than common sense would indicate. Yes, US data is looking weaker, but we must compare this to the slightly suspicious levels it was apparently being reported at for the 4th Qtr 09-1st Qtr 10. Virtually anything is going to appear grim against that.
The performance of the FTSE for the 2nd qtr 2010 is apparently its worse quarter since 2002, which is something of a surprise, as most would have thought that some periods in 2008 would have given it a run for its money. Yesterday’s failure to make much headway probably also had a bit of ‘half-year-enditis’ about it.
This morning sees the FTSE called some 85 points lower, after US and Far East traders decided that discretion was the better part of valour. Our quoted low overnight even managed to reach the low price of the Fat Finger event back on the 6th May, which should please the chartists amongst us. Equity yields are looking ever more attractive as inflation fears decrease (at least amongst Central Banks) and cut expectations of near-term rate hikes. The UK looks likely to be stuck with sub 1pc base rates for some time. On the lending note, the brief rally yesterday on the announcement that the ECB was ‘only’ being called for some €160bln 3mth lending was strange indeed and our dealers were perplexed as to how the news that a huge number of banks were still being forced to borrow at 1pc (money rates for €3m ae at around 0.75pc), due to lack of borrowing facilities in the open markets could have been considered ‘good’.
For those of you looking for a major blow out or a confirmed double-dip recession, I fear that the wait might be quite a long one. Things are difficult, but we should remember that most economists and analysts are still reasonably optimistic about future direction.
Not only this but the ‘Canary in the Coal Mine’ products like Long Term gilt prices and Gold are stubbornly refusing to push higher. It appears that not every financial sector is quite so terminally pessimistic.
This said, we must obviously take into account the current bear sentiment and not get too aggressive in any direction. We always say that if you want to make a £10 bet, you should actually just do £5. In the current environment, we would advise you to cut this even more. As mentioned the FTSE hit the previous quoted low for the year and we see this as possibly good support, as are the lows of yesterday around 4830/35. But the next major target for the Bears would be the 4695/4700 failure levels of Nov/Dec 08.
On the currency-side, the Dollar is naturally gaining some strength as woes over global markets rear their head again. The Euro still seems reluctant (though) to trade much below 1.2200 and the Pound is likewise seemingly not keen on giving up too much of its recent gains. Cable is now at 1.4890, with traders buying into the move lower obviously hoping for a retracement to the 1.50 level. There is good support at 1.4885 from the short-term bull trend line and then at 1.4855 from previous lows on moves down, but traders should beware a break below these as it may signal a return to Sterling weakness.
The Yen remains the strong man of the majors, which appears slightly odd given the country’s fiscal position and the Euro/Yen cross is still flirting with the nine year lows around the 108.00 level. We have had several attempts over the last three days to close under this mark but, even with an intraday low of 107.25, last gasp moves have always regained the level. This morning we are once again below 108.00 (just) and it will be interesting to see whether a close can be achieved below this point.
Gold remains near to its all time highs (1264) at 1240, but the woes of the equity markets do not seem to be, as yet, triggering another surge in the yellow metal. We seem to be trading around a mid point band of 1238.5-1240.0 either we are in a small range just above this or just below it and then remain in that range for hours at a time. Attempts higher are swiftly defeated, but the same can be said for moves down as well. A bit trite, but we are probably looking for a break of 1246 or 1234 to give us a bit of excitement.
Oil has finally started to show some reaction to the perceived possibility of another slowdown. Slower growth with increased production means lower prices. But we will really need some real economic data to send us significantly under the 75 dollar level, which was finally breached earlier this morning. This is the one market where we might expect price action fireworks in the near-term as a recovery in equity market sentiment might send us swiftly back to the 80 buck level, or continued pessimism may put heavy pressure on longs and force us back to the 68.50/69.00 support.