New highs on Friday seem to be leaving traders this morning rather confused. Resistance levels all over the shop have been defeated but (on the other hand) some of the future state spending cuts are starting to trickle through into the investor consciousness.

Over the weekend we have heard that a huge Rolls Royce US contract is on the line as President Obama looks to make some forward defence cuts. With the US now looking Eastward rather than at their old allies in the West the requirement for ever more complex hardware may be mitigated. Oddly enough the type of conflict in which the big three powers (US, China and Russia) are expected to get involved are more likely to require low end upgrades for infantry rather than vastly expensive aero and naval improvements. While these savings may be made in the defence budget (and we are hearing that the Conservatives might look to scrap the new Aircraft Carrier orders as well) the really hard issues are still to be fought. Labour have come out with the ridiculous Education spending cuts as a rather obvious red herring. There will no doubt be a whole swathe of these announcements speculating on cuts in front line services before the more reasonable, on the voter front, cuts in social security to the middle classes (child benefit etc) and in the enormous weight of Quango and near Quango costs are pulled out of the hat just in time for the election.

The last Budget seems to have indicated that income tax revenue will spike a rather unlikely 11pc in the year 2011/12 which has got the Tories in a huff about tax hikes. But in all honesty the squeezing of the top rate tax payers (from 40pc to 50pc) now looks to be more of a sweetener before everyone gets it in the neck. There is no doubt that the huge unfunded promises to pay of Mr Blair and Mr Brown of the last decade will have to be financed somehow. Tax rises of merely three percent on the basic rate look to be the least of our worries. The cloud on the horizon is getting ever closer and the problem of more money being diverted from the private sector to the public is going to get worse before it gets better. Economists are still undecided about the long term effects but the medium term are likely to mean stagnant growth (at best) for the next three to five years. Unfortunately the TUC are quite right when they state that cutting expenditure now (or next year) is likely to drive unemployment way through the 3m level and possibly into the near 4m arena.

The FTSE this morning is being called some 5 points off the 4.30 close but 25 off from the late 21.00 futures close. At the moment this is just a pull back from the highs but shell shocked index shorts will be hoping for some serious relief from the incessant grind higher. In truth the rally of the last two months has been exceptional moving over 1000 points since the 13th July and the short term trend line is so steep that we could fall to almost 5000 without breaking it, the medium term trend is even further away at around 4450(!). Dealers will be looking at the new highs at bang on 5200 as the new resistance but in reality the major barrier remains the 5210 and 5250 levels mentioned last week. There is some volume support at 5160 but an inability to hold here could pull us down to 5115-5120. Below here is the 5050/70 resistance now turned support level mentioned many times in previous comments.

Sterling is becoming a bit of a disaster area at the moment with each session showing greater inroads. While the GBP/USD is still 27 cents above the January lows the GBP/EUR is just 5 euro cents off the same time values. Since breaking the major trendline support last Wednesday the GBP/EUR cross has lost three cents and is not exactly looking like making it back today with the initial move to the downside once again. There is actually some good volume and price support around the 1.10 level but you are always left with the feeling that it might just be because of the psychological 110 number. For most of my time in the City the Pound has only maintained its strength through a constant implementation of an interest rate buffer versus the Euro/Deutschmark, Yen etc. Even then, the opportunity for lower rates through the last ten years was wasted by the BOE who maintained the high rate policy when inflation and real growth (non public sector) indicated a softer hand and now the poor old Pound is caught (in the words of Warren Buffet) swimming with no trunks on.

Gold seems to have decided that the area above 1000 bucks is just a bit too cold for the time being and we are oscillating about this mark in early action some 25 bucks off the highs of last week. Much as our clients would like to see a sharp move higher this would seem to be reliant on quite a few factors all moving in the same direction (low interest rates, weak dollar, uncertainty on the global economy and low production with strong demand among them). At the moment all of these issues are in place but for how long will this remain the case? Major support remains just below $993 and so long as we can stay above here the future is still bullish and the fact remains that we do not seem to have seen an exhaustion rally where the shorts finally give up the ghost. This has occurred in all of the moves higher of the last four years and, unless the spikes of Tuesday and Wednesday last week represent such an event, the longs will be hoping for a repeat.

Oil Battered at 72.00 level in the Brent and 73.00 in the Nymex last week without breaking higher. Now that the October delivery is finished with traders will be hoping that this year does not prove to be a repeat of last where the price of Crude dropped from $100 (where many analysts believed, at the time, the long term value was situated) to a low of 36 bucks by the year end. There is solid volume and price support at current levels in Brent all the way down to around 69 dollars and then below here at approximately 67.50 on the rising medium term trend line. Oil inventories are looking to be quite reasonable and just for the moment (crucially) the world seems to be entering a more politically stable stage with more and more states seemingly accommodating differences. Should the supply of oil suffer no unforeseen hiccups then we may settle into the current to slightly lower range (75-65 bucks) but in all honesty when has this ever actually happened! At 70.65 in Brent we are seeing two way business with as many seeing opportunities in higher prices as those looking lower. Unless we get above 72.00 or below 67.50 the range trade looks to be the one to play.