Markets remain in limbo with all support and resistance levels in the major contracts holding steady yesterday and the Christmas break looming on the horizon.
The debt crisis looming for a whole swathe of economies ca hardly be said to be unknown and as such is a difficult reason to make a play in one direction or the other. UK debt is likely to increase to an unheard of level which should drive long term rates significantly higher BUT on the other hand this is flying against the fact that short term rates are very likely to remain low for longer than expected. Playing the ‘yield curve’ has been a time honoured method of making money (especially for Hedge funds and Bank Treasury units with good access to liquidity) but the new regulatory straitjackets being proposed and enforced by the FSA, and others, will make this that much more difficult to sustain. Buyers of long term debt may well be more restricted to ‘real investors’ (Pension Funds etc) if liquidity rules are strictly enforced which might drive up the cost for hard pressed economies to fund their deficits.
The regulator (keen to avoid any failure which could be laid at their door) and the needs of the economy (requiring aggressive lending and flexible funding policies to boost growth) may well find themselves at odds in the coming years.
The FTSE is holding steady in the mid 5200’s and things look good for a quiet year end. The FTSE index seems to be trading in two separate bands of (roughly) 5180 to 5275 and 5285 to 5380. At the moment we are at the top of the lower band, 5270, and dealers will be hoping that we can push higher today to give the week a reasonable ending.
The Dow and S&P returned to the 10400 and 1100 levels respectively which (as mentioned a few time recently) seem to be exerting an almost gravitational pull. Markets look very comfortable indeed today and in the absence of any real economic news due out until 15.00 this afternoon the bears may be the ones under pressure in early action.
Currency markets are likewise stuck in very tight ranges at the moment with the Euro/Dollar seemingly unable to breach the major support at 1.4680 but conversely struggling to make it much above 1.4360. Cable seems to be maintaining its sang-froid in the face of prophesies of doom and we may find that the news of its death is greatly exaggerated!
Sterling does not seem happy below 1.6300 as traders try to get a handle on the growing dollar bullishness which seems to have arisen out of nowhere. Dollar weakness has almost become a belief system all of its own as Obama and Geithner have (for all of their protestations) appeared to be running a weak currency policy as a way out of the economic problem of too much debt. The greenback is in trouble of that there is no doubt but the US economy is already responding strongly to the medicine of lax fiscal policy and the aforementioned weak currency. If the rebound in growth does gain firm traction then the weak dollar story loses one of its central arguments.
Sterling is struggling to stay below 1.6300 but is likewise not exactly exuberant above 1.6340 and we have failed above here on both of the last two sessions. Our clients are playing the tight range but must (of course) beware a break out as we could quickly see 1.6450 or (if 1.6175 is breached) a renewed attack to the downside.
Gold has recovered some support falling to break the support mentioned yesterday at 1120/25 reaching a low of 1121. Resistance remains at 1145/50 and punters will happily play the range until one or the other is broken.
Oil inventories have lead to the falls to the current levels but $70 and below seems a step too far just for the momentand dealers seem keen to buy at prices below 71 bucks.