Suddenly things do not look so rosy in the garden. The equity markets continue to weaken day by day (although the FTSE, buoyed up by mining stocks, is doing okayish) as a sense of malaise permeates through investors confidence.
Recent economic data has been disturbingly on the grim side and dealers are struggling to see any light in the distance. The City (whilst by no means a totally true barometer) is seeing some solid redundancies going through and this is just one year into the ‘upturn’, hardly the time one would have thought to be thinking of cutting back. In conversation with a big investment fund manager I was struck by his comment that businesses that could normally be relied on to forecast the next 12 to 18 months revenue stream were now finding (or more correctly ‘not finding’) it impossible to unearth any visibility on earnings beyond the next 3 to 6 months.
We have consistently stated that current yields on equities would seem to make them very attractive versus virtually every other asset class and that this fact alone should be giving some backbone to the markets. Unfortunately this does not seem to be enough and the gulf between equities and bonds continues to widen. 10yr Gilt yields are now under 3pc which seems incredible considering the inflation rate, the future issuing programme and the value available elsewhere. But bond dealers are not fools and they are looking, seriously, at the prospects for sharp falls in inflation (possibly into negative territory), prolonged low base rates and (hoped for) reductions in bond sales.
Of course everybody might be wrong (this is always a strong possibility with financial markets) and bond yields might spike higher and equities soar through the autumn as a revaluation of risk and return takes place. One would like to hope that this would be the case but the trend (which is normally your friend) seems to be indicating the opposite.
This morning sees the FTSE opening around the 5200 level and the 5180/95 support seems to have held firm once again. Over the last few weeks we have had a couple of attempts to break below 5185 but both have been very short lived and ultimately unsuccessful. Traders will be watching, yet again, for any pressure on this level but we must remember that it is a ‘close’ below the mark that is technically important not a print below it. The upside looks very distant just at the moment but resistance here is at 5220/25 and 5250/65.
The US markets are not showing any such solidity and the Dow and S&P are now at the lows for a month. The Dow obviously has some support below here as we start to approach the 10,000 psychological level (we bounced exactly off this point in mid July). At 10130, the current price, we may find the bears running into a bit of mud if even a modicum of confidence is regained but at the moment they seem to have the game to themselves. The S&P is actually doing worse than the Dow in recent weeks and is now flirting with much more serious support at around 1050 which held good for a myriad of bear moves over the last 8 months. (the one closing break of this point in Late June almost took us to 1000 in the next few sessions).
As has been the case for quite some time now a weak equity market has been synonymous with a strong dollar [and yen] and vice versa with Sterling and Euro seeming to be the biggest whipping boys. Cable is now below 1.5400 as the late July rally is reversed with a vengeance. There was some heavy support around the 1.5460/95 level but this has been smashed to pieces in overnight action. We must regain this point soon otherwise the longer term momentum will switch back to sterling negative. While the cross has lost 6 cents in the last few weeks we are (still) rather surprisingly in a bull phase.
The Euro has been weakening along with the Pound (although it has not followed the overnight move) but the currency is still in a bear market direction (notwithstanding the big rally of the last couple of months). Support can be seen at 1.2620/35 and below here at 1.2475/1.2500 and resistance is 1.2690/1.2705 and then above here at 1.2740/55
Gold continues to hold steady ‘near to’ the highs and this seems to be something of a theme for the metal in recent times. Periods of stability and then a move higher or lower to a new level where we hold for a few sessions before moving on. Bulls will be eyeing 1218/1220 for signs of a break as this might indicate a renewed phase of weakness but in the meantime clients are picking up more longs to ‘take advantage of’ the small recent falls. Gold remains the hedge against worldwide problems (for many reasons but mainly, I believe, because people really cannot think of anything else to do!) and, if the equity markets do go through another bout of destruction, we can expect the doomsayers to be extolling the virtues of the Yellow metal once again.
Oil on the other hand has quietly slumped. Black Gold is now over 10 dollars off the highs of just two weeks ago and in truth looks very weak indeed. Longs are being squeezed ever more harshly and it must be said if the bond and equity market moves are anything to go by this is hardly surprising. Weak economies should not make for strong oil prices (even taking into account the ridiculous 2008 rally). This said we are now approaching the $68.50 to $70 support that has held good for almost a year now and so we can expect some technical buying to come in soon. The long term weekly bull trend line was broken yesterday (at around 73.90) which explains some of the session action and we really need to regain this level soon otherwise the prospects for a more concerted move lower will go higher.