Biggish movements in the markets this morning have virtually wiped out the 2nd tranche of the Obama sell off. In late action on Friday evening the FTSE futures took the market down another 120 points from the 16.30 close but the first forty minutes of action this morning have completed the rehabilitation and the senior 100 index is now unchanged on the day.

The UK’s numbers this week are expected to show the economy finally coming out of recession. Officially. Unemployment seems to have peaked, retail sales are reputedly picking up, even manufacturing seems to be more optimistic (although this is difficult to actually believe as the official numbers still show a failing sector) and the weakness of the pound is becoming less easy to depend upon. Even house prices are supposed to be on the up.

The weekend saw a huge amount of dissection of the Obama decision on bank ‘prop trading’, mainly ill informed. The fact is that banks themselves are very cautious of their prop divisions. The oversight of risk taken for its own sake is quite extreme and, aside from the odd rogue trader instance, the losses made by banks over the last few years have been nothing whatsoever to do with the trading units. The last few months have seen politicians making populist edicts against the people and companies that have done nothing to deserve such approbation. The reason banks make so much is that everyone wants what they give…money. Investment banks make huge sums because they are the only people willing to risk gargantuan amounts on funding (or sourcing funding for) speculative propositions and then charge through the nose for the facility. The fact that the last few years has seen the demise of many of the investment banks and the pulling in of horns from the banks who were looking to get into the space. This leaves the margins to be made by the few remaining units to be up in the stratosphere. Goldman is operating in a world where most of its competitors have disappeared and its clients are desperate for funding. Not surprisingly they are making vast sums. Obama’s reaction to the loss of Massachusetts (however you spell it!) risks far more than he realises. Removing liquidity from the financial exchanges will not solve any problems it will actually create quite a few as vast sums move markets far more than they might have done in the past. If this legislation goes through we may see a considerable increase in market volatility. Very good for the market makers but not much use for investors.

The FTSE hit the support mentioned on Friday comment at 5180/5200 and has bounced dramatically this morning. I have to admit the level was pointed out as an academic support as we were not exactly expecting such a dramatic reaction quite so soon. The support has now been confirmed and we are seeing solid buying from investors looking to get in on the unexpected weakness. Buyers have been kicking themselves for missing out on the Dec/Jan rally and many see this as an opportunity to possible have a second bite at the cherry. Time will tell if the sell off on the new Puritanism out of the USA is premature but dealers will probably need to be wary of market reactions to seemingly innocuous statements from senior administration officials for the next few months. Resistance to a move back up higher will be at 5310 and up to 5375 which we battled at fro much of November and early December.

It is easy to speculate that the selloff might be a one off but in the back of everyone’s minds is the ‘what if’ question. What if last years rally proves to be a massive trap for investors, what if the huge deficits built up across the Western world drag us all back into the mire, what if…etc. This said we have had a series of sudden falls of pretty much the same magnitude as last weeks in June/July and at the end of October all have been defeated by a swift move to new highs.

Currency markets were actually quite sanguine amidst all the mayhem with dealers not sure how everything would pan out. The dollar seems to have been the overall winner over the period although only just. The Euro has been the definite loser and this morning is once again making heavy weather of making a comeback. Huge sums have been quietly pushed into the Euro currency over the back end of 2009 and it is not yet certain whether this has been reversed yet. The Euro became the depository of funds with nowhere else to go (if you did not like Dollars) and with the EU project continuing to suffer under the inability to rein in profligate nations it is not difficult to mention that there might be significant ‘hope’ for a bounce back up. The problem with hope in the financial markets is that it is seldom answered.

Support in the Euro is at just under 1.4100 at 1.4080 and down to 1.4000. The momentum of the currency has been seriously dented in the last month and traders seem much quicker to get out on rallies than in the past. Resistance is at 1.4160/70 and higher at 1.4225 and 1.4300.

Sterling remains in the same old range and the support in the low 1.61’s seems to be still holding out. This said the moves down are much more violent that the climbs higher in recent sessions so longs at this level should be wary of sudden weakness.

Gold almost made it down to the medium/long term trend support at 1075(approximately) but failed again at the 1180 level where the fall out in December last year also bottomed. The market remains fragile but punters seem very happy to play the wide range between 1090 and 1140. Our clients remain positive (as they have been for years now) and a waking up to a small profitable bounce. As mentioned there is very strong support just below current prices between 1075 and 1080 and it is difficult to see much news in the near future which will force this issue (famous last words). Resistance is at 1103/5, 1114 and 1142.