So we commence the week just slightly in the red, after weakness in Asian markets. A sell off of mining stocks in Australia has fed through to early action in London, so for now we’re tentatively sitting on the fence.
Once again the Chinese factor is playing on the minds of investors, after the harsh words from their premier about keeping the yuan undervalued. It seems extraordinary that the Chinese can claim the Western economies’ demands to strengthen the yuan is an act of protectionism, when their currency has been pegged at such a low level against the US dollar for so long now. The Chinese are in a strong position, and talk of possible US trade sanctions is extreme as the US is so reliant on cheap Chinese imports. If the US was to restrict trade with China then they’d have to purchase the goods from elsewhere, at a much greater cost.
The other concern for global investors is the continued threat of an inflation spike, leading to sharp tightening by the Chinese. At the end of this year their economy is expected to be the second largest in the world, and it looks more and more like when the Chinese sneeze the rest of us will catch a cold.
European markets have started where they left off last week and this consolidation period continues. The FTSE is still stuck above the 5600 and fails to make ground. We might possibly see some interesting price action towards the end of the week, with triple witching; often you see some window dressing ahead of these expiries, with traders trying to bid the market higher.
The only economic data worthy of noting today is US industrial production that’s released at 13h15 our time (the US have already changed their clocks so for a couple of weeks US hours are out of sink by one hour). The weather is expected to have taken its toil on many industries, so a negative number should be expected although the consensus for a rise.
Sterling is suffering a little this morning after Moody has once again threatened to cut the UK’s AAA credit rating. Although the majority of the electorate would not understand the significance of such a downgrade, one gets the feeling that such a move could be the decisive factor in this year’s General Election. The early murmurings from Westminster are that Captain Darling will just tinker with a little spending cut here and a possible budget trim there in order to appease the electorate. That doesn’t sound like the sort of action that’s required to tackle our budget deficit, and a downgrade to our credit rating will cause serious damage to our economy.
After touching 1.52 earlier this morning, cable has had a sharp correction to the downside now back below the 1.51 mark, and is looking relatively unhappy around these levels.
The weakness for sterling and euro this morning has assisted gold, which continues to find support at the 1100 level. The support is being provided by the news flow from China over the week end, as they have made it clear they are concerned about their billions of US dollar investments. Whilst they make continue to make noises about switching into other alternative reserves such as gold, any rational investor knows that gold is a risky investment, the price of which can go down just as easily as it can go up.
Oil is weaker as a result of the concerns about Chinese policy tightening and so we’re back below the $81 level. Similar to equity markets, oil has also been consolidating around these levels, failing to break to new highs, with attempts to test $84 running out of momentum quickly.