Yet another morning of disaster for the Euro after the press finally took note at the weekend of the fact that the currency looks a bit weak.  The Bears have been looking for 1.2350/1.2450 for quite some time, and we can now say that the target has been achieved.

As mentioned many times in these comments, the more aggressive players are looking to the 1.1600 level, but the press has been even more negative giving column inches to those calling for parity with the dollar in the longer term. This is not as outlandish as it might appear, as the currency was (back in 2000 -2002) well below this mark recording an historic low of 0.8230 back in Oct ’01. In 2008, the currency fell from 1.6000 to 1.2330, a 23pc decline, this years collapse has so far knocked ‘just’ 19pc off the cross rate. I am always a little nervous about projections on currencies that would move the cross into uncharted territory, but merely going over old ground is not so difficult to swallow. This having been said, the more people talk about an event happening in the financial markets, the general correlation that the event actually fails to appear. Just as the world and his dog started talking about Sterling parity with the Dollar and Euro a year or so ago was just the same moment that support appeared.

Unfortunately, this time the Pound seems to have caught the same cold with Sterling dumping almost 2 cents so far this morning and is trading a new 12-month low of 1.4350 as I write (having hit an actual low of 1.4250 in the wee small hours). It seems that while the TV and newspapers love the bright new world of Clegg and Cameron, the financial world is just seeing ever more spending commitments with nary a word about fiscal restraint. Speeches about the problems left by Labour, obviously preparing the electorate for what ‘must be done’ mean nothing to worldwide investment community, what they want is to see something actually ‘being done’. We still have some 40 days to go before the emergency budget and this commentator is quite ‘excited’ as to what the markets might do in the meantime. There will be, of course, sharp rebounds as well to contend with as politicians postulate austerity packages etc, but at the moment all we have for sure are more taxes on the Banks and a probable/possible hike in VAT. Both of these are just the same old thing that the last administration did … taxing people/institutions more with no restraint on Public Sector spending. Tax hikes on the financial sector sound great to the general populous and are therefore very popular with politicians, it is just a shame that the correlation means lower lending, reduced exposure to the UK, hits on Pension funds and in the end the risk of total loss of business to financial centres abroad.

It’s nice to see that the investigators in the US have identified the lack of prop desk liquidity as the prime reason for the massive falls on the 6th May. As the markets started to drop, the market makers (fearful of ending up with stock in a falling market) pulled their bids. This is potentially the unseen consequence of all those well-meaning efforts of the White House to prevent banks from ‘Prop Trading’ (where does Market Making end and prop trading begin?); if Prop desks are closed down, wholesale we can expect increasing volatility as the same level of real business is faced with less liquidity. Any major seller/buyer will possibly cause much greater movement in the markets, as counterparties struggle to soak up stock.

The Indices are opening lower, with the FTSE called at 5200 again and the rebound from the drop in early May is now looking more and more like a ‘dead cat bounce’. Our clients are actually quite flat of indices, with sellers and buyers matching each other off rather neatly. There is good reason for this as, on several levels, we are in a rather contradictory scenario. On the one hand corporates are actually doing quite well, as cost cutting of 08/09 is now running into the general slow pick up in business and interest rates remain low for all of the longer term fears. On the other, the markets have definitely turned more bear-friendly (having been the Bulls companion for so long) as technicals turn negative, sovereign debt issues appear, impending tax rises/spending cuts loom large and, finally, inflation worries add to gloom over possible rate hikes.

There is some minor support for the FTSE at 5175 and resistance at the old 5240/60 level. It would be surprising if the current bear-move broke the strong 4950/5000 support, being the level from which most falls of the past eight months have failed, but it must be admitted that confidence is very fragile at the moment.

Oil is weakening once again, as well and we are now below $74 for the July Nymex contract, while the June contract looks like expiring at the $70 level. A four buck difference between the front/next month contract delivery is unusual, for those looking for fragile signals in the Black Stuff, this is a reasonable sign of bear tendency in that a weak front month implies no constraints on inventories or supply. For the July contract to recover dealers must have some indication that what is in evidence now, will not be so over the next few weeks. There is exceptional support for June contract at (69.50/70.00).