Things are looking a bit perkier this morning after the Far East managed a bit of a burst higher after expectations that they might follow the late Friday falls of the US.
The ‘rose tinted’ view of data continues to drive markets as more and more reasons are found to buy equities even as the driving impetus of the actual economy seems to be stuttering once again. As mentioned last week (before the surprising GDP numbers) much of the data over the past month has been rather less cut and dried in favour of a recovery than the headlines appear to have suggested. For all of the economists’ readings of the tea-leaves much of their conclusions have been drawn from surveys rather than core data.
Gordon Brown’s duplicitous talk (much derided here over the past three years) about the UK economy being in a better position than any other to withstand a global downturn has now been shown to be so much hot air. While the final numbers for the Public Sector debt for 2009/10 may well be under the ‘finger in the air’ number of £175bln the pathetic attempts by both political parties, so far, to really address the critical issue of too much state expenditure has seen at times like Nero fiddling whilst Rome burns. The issue may be one of increasing tax revenue but as everyone knows increasing the tax burden is an operation of diminishing returns. Unfortunately the sacred cows of public sector spending will have to take the strain to an increasing degree.
I am also not convinced at the inflation data that we are now getting. In the past the crying of the press over the numbers being too low has been unfounded in the face of the overall data. But I am now seeing across the board increases in food, toys, newspapers, fuel (again) and clothing that appears at odds with the current near 2pc level. Many of these items rely on imported goods to stock the shelves and, with marginal growth in the rest of the globe coming through to take up excess capacity, foreign exporters seem to be less inclined to ‘cut a deal’ with UK buyers to soak up the sterling weakness. The fall in the pound at the fag end of last week was precipitous even by its standards forcing the worst day since the collapse in January and this will not be helping with the pressure on retailers.
While the press is full of ‘winter of discontent’ warnings for the Government this pressure is likely to come solely from the public sector side of the equation. The private sector is well aware that business is not good and the rising tide of the dole queue is not something that they can do a ‘King Canute’ in front of. As such, the current administration might be in a good position to “appear to be strong” as the impact on the economy of state employees removing their services has less of an impact on the actual GDP or Tax revenue.
This morning we are seeing little change from the official closes on Friday mainly, as mentioned, by the good performance out East. On the other hand traders seem unwilling to actually buy much up here and we are seeing little in the way of impetus right on the open to get excited by. Our clients remain long of equity and happy to be so but new position taking seems to be drying up.
This week we will see Q3 interims from both BP and Shell but in truth it is difficult to imagine two companies less attuned to the country that they are nominally quoted in. Their producing base is, ever increasingly, global rather than North Sea and their product is priced in dollars. Oil has been (of course) lower over Q3 ‘09 than Q3 ’08 but the next reporting period (Q4 ’09) should have a more favourable comparator and with both companies cutting costs through the past year their share prices definitely reflect the more positive outlook.
Glaxo also come to the market with the lights turning nicely from Amber to Green as their non domestic income continues to perform.
In fact all of the big reporters this week seem to have one thing in common. They derive much of their revenue from outside the UK. BAT, Kazakhmys, BG Group are big in the UK but even bigger abroad. The data from these companies may well flatter to deceive as the more domestically focussed units are probably still struggling and with nothing great to look forward to in 2010 as austerity begins to stalk the land.
Oil does indeed seem to have found a comfort level around 80 bucks as speculated last week. We have had a couple of good solid attempts at holding above 81 dollars but the effort so far has proved too much. That said the bulls are still very much in control but a few late comers to the ride have come away with bloody noses. Support can be seen between 77.60 and 78.20 and much lower at around 74.60 but the target for the bulls remains the 85 mark and then 90.
Gold remains comatose after yet another attempt to break above 1065 ended in failure and the 1045 to 1065 range is becoming ever more entrenched. The longer we remain in the range the pressure will increase proportionately for when a break out occurs. But for the time being going with the current band is paying dividends for clients.