The FTSE has broken above the 5070 resistance level right on the off and punters have been scrambling to cover short positions. While this might prove to be a false break many short term traders are not willing to risk it and after selling heavily from 5010 up to 5060 yesterday trading has become much more two way.
The news overnight is nothing special and the Far East session did not exactly set the town alight so the immediate shift to the upside on the European open has come as something of a surprise. Added to this has been the reaction of other asset classes with Gold and Oil rising strongly while Long Dated bonds have largely trod water.
In all of this there is something of a conundrum in that the economic scenarios that benefit one asset class are generally seen as poor for others. The rally over the last few months in all products would seem to fly in the face of reason. Of course the problem in this is the continued worthlessness of ‘cash’ as opposed to everything else. Fund managers seem to be scrambling to put their money into almost anything as those who have stuck to what might be a prudent cash holding have seen their performance indicators versus all market measures (and their more aggressive competitors) plummet.
The Bank of England apparently indicated that they might look to cut rates on bank reserves to encourage them to lend it out(?!). We appear to be entering a sort of fantasy world where politicians and the Bank of England are ever faster to castigate banks for lending unwisely whilst on the other hand are constantly twisting their arms to lend more! The fact is that, in the depths of a recession that many feel might have a second phase yet to come is, the banks have no wish to load up with a huge swathe of new exposure, and risk not only their profitability but also another round of abuse from the press and politicians, if it all goes wrong.
Nice to see the gall of Lehman’s lawyers trying to claw some money back from Barclays over the sale of the broking unit back in Sep/Oct last year. Obviously Barclays picked up a steal but this type of ‘wise after the event’ legislation is not reasonable. In the US, of course, they may well win as the courts over there have a habit of awarding victory to the domestic plaintiff. In reality Barclays were the only buyer at the time, the world looked to be going to hell in a handcart and I remember, if nobody else does, that many were quite aggressively disparaging of the bank for spending two billion of scarce resource (cash). The acquisition also led (to some extent) to the bank having to go to the Sovereign funds for fresh capital to avoid the fate of RBS and Lloyds.
As mentioned yesterday Gold looked to be about to make a break out, I just could not see which way, although the emphasis on the continued ability of the metal to stay above the critical $993 support might have given an indication. This morning for the first time in quite a while the Europeans have actually come in on the buy side and have taken us to new, recent, highs. Fir the last week or so we have had the Far East buy the market up only for the early European session to sell it back down. Yesterday evening and this morning the US and Europe seem to ave decided that if it will not go down then it will probably go up! Aside from the intra day spike (which reached $1029) back in March 2008 we are now at the all time high for the asset. Caution will have to be exercised, though, as we cannot be sure that the move today is not a short position squeeze that will be reversed later in the session.
As feared in yesterday’s comment the pound came in for a bit of a hammering but I have to admit it was helped on the way down by the BOE comment on Bank reserves. Both the BOE and the Fed (as mentioned many times here) seem to be running a covert weak currency policy, albeit with occasional statements to the contrary to assuage Far Eastern investors. Inflation is the counterbalance to running such a policy but, at the moment, this is being kept in check by the general weakness of their respective economies. Of course this is a long term play and not one that really needs to impact short term traders but the balancing act of huge fiscal stimuli, weak currency, continued massive trade and budget deficits, inflation pressures and only marginal growth expectations is one that probably keeps the Fed and BOE awake at night.
Cable managed to hold above 1.6400 yesterday as we continue to trade in the low 1.60’s to mid to high 1.60’s range. For that last four months anyone selling above 1.6550 and buying below 1.6200 would have made a killing many times over. At some point a confirmed break will occur and then sparks will fly but it must be remembered that the GBP USD cross traded at around 1.98 with the occasional attempt above 2.00 for a year and a half from Nov 07 to July 08 before the massive shift to the downside so sometimes these things can take time.