Just when we thought it was safe to get back in the water, the Greece debacle has blown up once again.
Greek debt went on a truly epic journey yesterday, with 10-year yields moving from around 7.5pc to 8.9pc, with two-year money now over 10pc. The value of the debt has fallen by almost 20pc since the end of March (already a grim level). On a comparable basis with the total owing at close to €300bln we are looking at institutional losses of some €40bln just in the last three weeks! Anyone want to bet whether Goldman’s were short?
Oddly enough, the UK’s debt position is actually slightly worse than Greece’s and we do not have somebody hovering over our shoulders forcing fiscal prudence on us, but still Gilts yields are stuck at around the 4pc level. The reasons for this are myriad, but generally boil down to the fact that we have freedom to adjust interest rates, currency levels, run inflation risks etc; options that are not available to the Southern European states. Unfortunately, of course, the long-term prognosis of this is one of three: inflation rates are going to have to spike much higher, the Pound’s value will have to plummet or the politicians will actually have to do something about the massive accumulation of debt (not just about the annual deficit). This is not a very good list of ingredients for investors contemplating a foray into UK plc.
The FTSE is back to near the bottom of the current range at 5670. The support is at 5650, which proved a barrier on the way up and is now proving to be a good prop on the way down. US markets are not suffering in the wake of the European problems, and the Dow is actually just 50 pips from its high of the year. Every attempt to break back under 11000 has been beaten off and, in truth, it is very difficult to recommend a bearish strategy for the other side of the pond. On this basis, it is also a tough call to be negative on Equity markets anywhere for all of the sovereign debt problems elsewhere.
Currency markets are the place to be at the moment, with the Euro continuing to weaken under the glare of all its woes. In reality, it must be admitted that this commentator is quite surprised that the currency is still so high that it is still significantly over-valued on a cost basis versus every other Major. Overnight, the currency finally slipped below 1.5260 major support and immediately dropped to 1.3200, but there has been no follow-through on this initial break and we now see the cross at 1.5250 just underneath the mark. Longer-term bears will still be looking for a move towards 1.2450/1.2500, but the hard-pressed bulls will also be taking some comfort from the fact that the currency does seem to have quite a few supporters. With all the bad news you might have thought the price would have fallen even further.
Of course, one of the things holding it up is the quite evident fact that every one else is pretty much knee-deep in the manure as well. We are not arguing about which currency is the strongest, but which is the weakest. On this note, the Japanese GDP/Debt levels are now far in excess of 200pc and with deflation this total is increasing in real terms year on year. With a rapidly aging population, it is very difficult to see how they are going to extract themselves from the mess they are in and while the problems are containable, currently the future looks grim indeed. The Yen may also be quite over-valued and, even though they are still a heavily trade-surplus nation, they desperately need a weaker currency. Maybe we will see a long-term battle to the bottom, as all the current ‘majors’ fight to lower their currencies.
Gold is back at the 1140/42 level, which has proved so pivotal over the last five to six months. The charts look bullish, as supports have been holding on the downside for some time; if you discount the ‘spike’ and subsequent retreat of November/December last year, then the trend remains higher highs and higher lows. As readers will know, I am not a Gold bug and on a fundamental level I can see fewer more useless places for investors to put their funds (as you are not providing investment monies for anything at all). Gold is a pure defence play against everything else falling in absolute value. This said, the previous comment on currencies indicates that the majors are weakening … If this continues then ‘ipso facto’ Gold should rally. Eventually, of course, interest rates will have to rise (long-dated monies are already showing signs of this), in this environment Gold may struggle, but for the moment the yellow metal is enjoying its day in the sun once again.
Oil prices have gone a bit weird once more, with the Brent June Contract rising to 2 Bucks over the Nymex June delivery. A few weeks ago it was 2 dollars under it. Long-term averages have normally seen the ‘Crack Spread’ trading at around 1 dollar in the favour of the Nymex contract, so we are seeing quite a bit of Brent shorting versus the US delivery. This type of trade has proved very profitable over the last few years, as the cross has continually moved up to these types of levels only to reverse back again later in the game. The worrying thing about it this time is that the spread has widened at a time that is not close to a delivery date. Often weird moves are caused by traders being forced out of positions as contract expiry looms. This time this is not the case, so traders of the spread should be wary of getting too carried away.