Stability is returning to the markets after the fun and games of the last few weeks, as governments start to take the radical steps required to reduce their various deficits. Spain has followed Ireland down the route of sharing the pain all around, with wage cuts for public sector employees but, with an economy of 20pc unemployment already, this reduction in purchasing power is likely to leave growth an elusive companion. In the UK the pain is still being levelled at the wealthy portion of the populous, with tax breaks at the bottom being paid for with Capital Gains increases at the ‘top’. Unfortunately, this is just robbing Peter to pay Paul and nobody has yet indicated anything radical to actually cut the deficit and taxing the rich is not a solution as this is a game of ever decreasing returns.

Currency markets look as though they have been expecting some comment as to the way forward, but we might have to wait some considerable time, as the interim budget is not expected for a couple of months. We can expect a few ‘leaks’ to newspapers/BBC/Sky over the coming weeks, as policy makers attempt to gauge appetite for different ideas.

Unfortunately, while the two leaders are no doubt very earnest about their objectives (and very photogenic), they and their cabinet are very inexperienced and the markets may begin to worry about their appetite in making hard choices. The pound may well be in the firing line if policies are not seen to suit the problems. The QE of 200 bln may well just become an exercise in printing money rather than a liquidity injection to be redeemed at a later date and if this is the case, fears will inevitably rise over inflation, especially if public sector spending is not seen to be being actively reined in.

Today sees the UK trade balance release at 09.30, which might cause some ructions (although to be fair trade, numbers tend to be almost ignored these days by everyone except the currency markets). Corporate earnings continue to please on the up-side, as the rebound from the woes of 08/09 appears to be gaining traction. The only fear here is that with a general contraction in state spending, how much can the private sector take up the slack?! Some 34pc of the working population is directly working for the government and another 8-12pc probably reliant on government business of one form or another. If this sector is squeezed, then the spill over into the rest of the economy is not exactly encouraging of a stimulus package.

The FTSE is trading at 5420 as I write, up 40 points or so, but there is serious resistance at 5430/35 and we are seeing selling at these levels from our clients. The US markets are similarly strong and indeed the Dow is now just 300 points from the highs, although the 10900’s up to 11000 did prove something of a barrier back in March/April.

Trading in currencies is becoming ever more frantic, as dealers try to ‘bottom pick’ the Euro, but in truth the bears still have the upper hand. The rally this morning up to 1.27 in the Euro/Dollar has been quickly reversed and we are now pressing the 1.2570 support. The target for the bears remains 1.2350/1.2450, but this is now quite close and so we may see more and more short covering coming into play. As mentioned a few days/weeks ago, the more aggressive players are focussing on 1.16, which is not so unreasonable now that we have dropped some 10 cents since mid-April.

Sterling has also slumped this morning, as the city worries over much of the problems raised earlier in this comment and we are not under 1.48 and pressing the major support at 1.4770. Cable has not closed under this point since April last year and dealers will be fearful of a rerun of the attack early in 2009 that had sterling hit lows of 1.35/1.36 in a sustained (although ultimately unsuccessful) attempt at a full blown currency crisis.

Gold reached new all time highs yesterday, falling just short of 1250, and we have now seen a small pull back as profit takers have pushed us down to 1235 (still above previous highs) this morning. As readers will be aware, we have been nervous of a sharp shift higher for some time and the events of the last few weeks have proved the case. With states now actually making the budget cuts called for by the markets for so long, we may actually be in the final phase of the shift higher as the worst of the ‘printing money’ could have been reached. The IMF/ECB €750bln injection could finally be focussing politician’s minds on the consequences of their domestic policies of largesse.