Much as it might surprise readers the biggest investment market in the world is not equities…. it is bonds. Sovereign, Supra National, Local Government, Corporate, Mortgage Backed even, in rare examples, personal issuance etc. This market (if it is correct) is now telling us a worrying story of our future with low rates, low growth and possible deflation leading to recession followed by paltry growth followed by recession and so on. The possibility of a Japanese effect occurring in the West has moved a step closer over the last few weeks as the glow of the rebound in the world economies after the financial crisis continues to wear off.
Long dated gilt yields have now dropped well below 3pc to go with the US yields below 2.5 pc and Bund yields now at 2.2 pc. These levels are now lower than the period of the great depression. To put it another way, for many years there have been desultory movements for the government to try to help out OAPs who bought undated War Bonds back in the Forties by redeeming them at par value. These bonds are now trading at 85 and anyone redeeming them would probably be considered foolish as they yield a relatively generous 4.15 pc.
The problem with this is that if the Bond markets are correct then the equity market is in for a terrible time but (although the US markets are looking fragile) the FTSE is actually not doing too badly. Yes we are down a bit over the last week or so but even by recent price action it can hardly be described as disastrous. In fact we are pretty much in the middle of the last four month’s trading range and only 250 from the recent highs (but 350 from the recent lows). So what is going on? Why are the analysts and the newspapers so full of dire warnings? On paper things look grim indeed. Home sales and new mortgages are falling off a cliff both in the UK and in the US and, as both countries are heavily tilted towards the service sector, this is generally assumed to be a harbinger of things to come. Growth seems to be stalling elsewhere as well (aside from Germany, where else!) as governments rein in spending and the odd unexpected profit warnings from an array of small to mid sized companies has suddenly taken the sheen from the generally outstanding first half numbers that took markets up to their July/August highs.
Not only this but personal anecdotes seem to be starting to turn nasty as stores cut prices, car parks (even for the summer) seem unusually empty, restaurants are easy to book and redundancies in even well performing companies are making small headlines. As mentioned many times in these comments we seem to have been in the process of a ‘jobless recovery’ which has now stalled. Remember the next batch of school leavers and university graduates is now hitting a jobs market that has virtually no capacity to absorb them.
To the Markets.
The FTSE fell some 75 points yesterday and is off another 15 or so today still above the lows of the last session of 5105 at around 5140. Traders seem very cautious about taking any positions out in single stocks but ‘contrarywise’ appear happier to chance their arm in the indices with a rare old battle between the bears and the bulls. Normally on a move down of 250 points we would be finding a large number of buyers looking for a bounce but this time they are almost matching themselves out. Support is at 5080/90 and at 5110/15 and resistance at 5165/70 and then the old, old level of 5185/5200.
The US markets as mentioned before do not seem so supportive with the Dow managing a bounce off the 10000 level and the S&P achieving the same thing off of 1050 but in both cases the rebound has been miserly in the extreme when equated to usual reactions to a failure to break such significant levels. In the US we have the Durable Goods number out at 13.30 and then New Home Sales and Mortgage applications at 15.00 if any of these disappoint the market may take another bite out to the downside BUT it must be warned that everything is so bearish just now that a positive number(s) may well force a considerable relief rally.
Currency markets have continued to favour the Yen and Swiss franc and their respective overvaluations are now approaching the extreme territory range. Goldman has apparently estimated that the Yen is 20pc overvalued. The problem with this is that a week ago it was 15pc overvalued and before that 10pc etc…. at what point will overvaluation turn around into a move higher? We can say that the Yen had very strong support around the 84.85/85.00 mark which was broken yesterday causing the sudden sell off down to the low of 83.60 we have now rebounded to 84.40 but we really need to get back above the support level before buyers regain some confidence.
Against this move higher for the Yen versus the Dollar the Pound and Euro have conversely been weakening against the Greenback as flight to quality means Bonds, Swiss, Yen, Gold, Dollar, Pound and Euro (in that order). Sterling has fallen below 1.5475/90 and those hoping that this might prove to be a support level have been disappointed. The cable chart over the last two weeks or so is decidedly nasty as we have neatly reversed the late July move higher. We have some minor support at 1.5375/85 but below here traders may well be looking for 1.5150/1.5200.
For the Euro we have now returned to the old battle ground around 1.2450/1.2700 which dominated support back in late 2008 and early 2009. Make no mistake the trend is still bearish for the Euro even though we had the big bounce in June. Old problems are likely to resurface and some of the Garlic belt yields are now wider versus the Bund than when the crisis of May was in full swing. Greece long dated debt is now over 11pc!
And so we turn to the strangest market of all yesterday which was Gold. The market started on the soft side and then slipped sharply in the early afternoon. As the Americans came in through the rebound was violent and we recorded first a drop of 15 bucks and then a bounce of 25. all in a short period of time. But then….. we stopped…. Ever since four thirty yesterday the market has traded in a three/four dollar range between 1229 and 1233 (we are currently at 1231 in the middle). If I was being paranoid I would suggest that there was just a tad of manipulation going on and there was a very, very large option expiry either yesterday or possibly today at or around 1230. Anyway longs are still confident of a rally and our clients continue to buy on any pull backs. We seem to have run into something of a wall at around 1234/36 but aside from the weird action mentioned there seems no appetite for profit taking.