There seems to be a certain amount of nervousness around at the moment with equity markets holding their recent ranges (the FTSE to the middle/top and the US/Dax to the middle/bottom) and Gold pushing for the upside. In times of concern Gold has frequently been a canary in the coal mine (although not always) warning of imminent but unquantifiable fears around the corner.
The last four weeks have seen something of a hiatus for the Equity markets with tight ranges dominating and the odd day or two day break out giving us some interest. The drop in the middle of last week came out of the blue and, worryingly for many of the global indices, there has been no significant rebound (the FTSE being the notable exception). As mentioned a week or so ago the summer months have been notable for the sudden cessation of news stories about the sovereign fiscal problems of much of Europe but this is likely to change as the political classes of Central Europe return from their extended holidays. Just because the headlines have gone from the front pages does not mean that the problems have been solved with a €750bln support package. Not only this but inflation, continually disregarded by the various central banks in their drive to resuscitate growth, now appears to be raising its ugly head as it proves to be much stickier than hoped in the UK and is now at a near two year high in Europe.
Not that the Bond markets seem to have noticed as the Bund and Gilts hit an all time high yesterday. This is because Base rates are likely to remain very low for quite some time as central banks continue to attempt to stimulate economies through the tried (and one would have thought ‘busted’) route of cheap money and so long dated yields have finally followed them down. With China and the cheap manufacturing bases now experiencing some considerable inflationary pressures it is difficult to see where any external disinflationary impulses are going to come from. We may find that the ‘new’ era of cheap money runs full tilt into something of an inflationary spiral.
The FTSE is looking to open at the top of the range (again) as investors look for a break above 5305/15 once more. One wonders how many times we can have a go at the same level without success. As with the 5415/25 resistance in Late July/Early August we seem continually of the verge of breaking higher but never quite manage it. Clients are selling at the highs in pre-market trading (unsurprisingly) hoping for a repeat of the last three sessions. This is a dangerous game to play in too big size but on past performance is a natural reaction. There may be an attempt on the open to push us higher and take out some weak shorts but if we have failed to make headway by the US open then sentiment may begin to turn against the bulls.
As mentioned yesterday resistance is at 5305/15 and 5355/65 and support at 5225/35 and 5170/75. Oddly enough the tight support/resistance levels of pretty much exactly defined yesterday’s range and so it is not a massive leap of faith for day traders to try the same today.
Currency markets are quite stuck as well with the Euro meandering about in the mid 1.28’s and Cable holding its own around 1.5650. Yen seems stuck in the 85’s and it is slightly worrying that the dollar, which has rebounded versus the Euro and Pound, is still wedded to the lows against the Yen. The attempt to bounce late last week has been reversed and (while the Yen looks heavily over valued already) the momentum seems to be showing the way to even higher ground. Very strong support for the USD/YEN is at 84.90/85.20 which is holding for the time being but longs should be wary of a break lower.
As mentioned Gold is grinding ever higher and is now at 1225 pretty much its high for a month or so. There is some resistance at 1225/1227 from the previous support level in June and this may well hold us back for the time being. A break above here though might give the bulls just the reason they need for a push to the highs. On the other hand (of course) pull backs are meat and drink these days and so shorts on our book are finally building as our clients start to come out of long term longs.