Sterling reacted very badly to the new opinion poll in the Sunday Times showing that Labour were in line to retain power. Currency markets are a global product and moved by an external outlook to a country’s position and so we can extrapolate the move (and the weakness through last week from the prior weekend’s polls) to the fact that foreigners do not have as high opinion of Messrs Brown and Darling as we seem to. The mood was hardly lightened by pictures this morning in the newspapers of a desperate middle aged man attempting to prove his virility by jogging in the rain. Mr Cameron’s PR people should realise that there a few sadder sights than a man ‘of a certain age’ running for the cameras.
With QE and low rates likely to dominate for the short to medium term (no matter what the Fed indicated on the Discount rate) the pressure cooker outlet is almost certain to be the currency markets for the foreseeable future with the occasional blip in the Bond markets just to remind us as to what will happen when things turn a bit tighter. We have grown used to the idea that rates will remain at the current levels for the rest of 2010 and that the slack may begin to be taken up through 2011/12. 3 month money is currently at about 0.65pc and year end is only ‘expecting’ minor hikes to around 1.125pc. In reality the ‘expecting’ bit of the last sentence should be under the word ‘insurance’. Most of the market does not expect any move before Q2 next year in anything except in the direst of needs (i.e. if the currency goes into freefall or inflation really gets a grip).
All this leaves Sterling rather high and dry with few friends in places of power.
The Equity markets, though, continue on their way quite serenely as the woes of the various sovereign states remain out of their zone of influence. Tax rates do not impact the corporate side to nearly the same extent as the domestic as revenue authorities recognise that too high an attempt to extract money will just result in the removal of the company concerned.
This said the FTSE is now at the top of the trading range of recent times and traders are looking at getting out of longs and possibly (if we start to drift lower) venturing a short or two. A break and close above 5400 might give the bulls more to get their teeth into but for the moment things are actually quite peaceful as neither the up nor the down direction looks a favourite.
The S&P has (once again) managed to climb into the 1110/1112 region and as with myriad previous comments the bull will be hoping that activity above this mark finally turns into a break. We have traded above 1110 quite a few times in the last few weeks (and historically in November/December last year) only for the close to disappoint. Today looks like being another attempt at the level and the more cautious traders will be sitting on their hands awaiting events. For those with more aggression we may see some two way activity as bears look for a repeat of previous failures at this level and bulls try to get ahead of any break out.
Sterling as mentioned is suffering in the light of the possibility of another Labour or a hung administration. This is a natural reaction as difficult decisions are definitely not the forte of either Brown or Darling. This is clearly shown in the continued wage inflation of the public sector when the rest of the population is suffering the effects of the last few years. If there is no appetite to get to grips with public spending in even this most basic of areas where is the political will to actual make cuts going to come from? As mentioned in previous comments once 1.55 was defeated there was little to hold the currency from a swift move down to the 1.50/1.51 range and so it has proved with Thursday through to early this morning giving up over 300 pips. Major Support is at around 1.5060 but it must be admitted that Sterling is not the only currency in trouble so it might not be all one way. The UK’s problems are very current but the Euro is also in a bit of a pickle but with the ability, currently, to spend its way out of trouble (or at least push the day of reckoning further into the future).
Gold has moved back up towards the top of the trading range having unsuccessfully probed the sub 1100 level once again. Time will tell if this attempt to break above 1124/1127 will come to anything either but our clients seem confident that a break higher is imminent as longs dominate shorts to a considerable degree.
Oil is also probing the top of the range as we try to breach 81 dollars once more. Nymex is trading at 80.34 in early action as traders found that the barrier of $78 and $77 proved just as unpalatable to a move lower now as it did to a move higher in early Feb. We may now find that the trading range of 77-81 proves very attractive in the medium term as any break outs are irresistibly pulled back into the fold.