A very difficult (and quiet) start to the week. On the one hand, equity markets are undoubtedly very cheap versus other asset classes, but on the other there are very well-grounded fears that things are about to get a whole lot worse.
The price of Gold continues to creep up (overall, if not on the open this morning) as investors continue to worry about global markets and possible further fiscal stimuli. The Yellow Metal is becoming a sort of ‘Canary in the coal mine’ continually cheeping just before another explosion. We have frequently mentioned the poor money supply numbers as a worry for future growth and with G20 now out of the way, yet another anti-stimulus measure has been enacted. In the same way that generals are often accused of re-fighting the last war politicians now seem so desperate to prevent another banking crisis that they are willing to drive us into another downturn to achieve it.
By law, banks will now have to massively increase their capital over the next few years, just as Western governments are imposing massive budget cuts/tax rises. It does not take a genius to work out that in this environment, the only real way for growth to match expectations will be for huge increases in QE from the US across to Western Europe. Unfortunately, of course, this will merely build up problems once again for the future.
Anyway, this morning sees the FTSE start off pretty much where we ended on Friday night, at 5070. Support remains at 5050 all the way down to 4950 and as mentioned many times in the past few months, this region has seen the lows (aside from a couple of intra-session spikes) of every bearish move since last September (five of them). In the market up to Mid-April it was bullish support with every succeeding bounce rallying higher, but since then we have seen every rally failing at a lower high. It is a way away just now, but if we bounce from here we will need to close above 5290 for the Bulls to get long-term excited. There is some good support from 5030/5040 on the short-term rising trend line set up from the spike lower back in early May and day traders will be watching this level for both a buying level (above it) and a selling point (if we drift beneath it).
As mentioned last week, the US markets are looking a tad soft as economic data turns more unfriendly. A good sign of this is when politicians start to focus on outside events for positive news clips and we can see President Obama starting to spend time away from ‘the economy’ to focus on news driven events (BP, Afghanistan, Bank bashing, etc). The post recession bounce now seems to have run its course and we must now worry about the strength of the stimulus required to keep the growth story going. The Dow is now 450 points from the highs of just a week or so ago, although we are seeing support around the current price (10130/60) and, as mentioned earlier, equities versus bonds are at historically good value levels, which may tempt some of the longer term players into the game. Support is at 10130/60 and all the way down from here in a series of little levels, but the critical price is at around 9800/40 which forms the long-term bull trend support and the low point of several moves lower of the last six months.
On the currency side the Euro, Pound and Yen continue to fight back against the Dollars strength of the first half of 2010, although the gains seem to be running out of steam just for the moment. 1.2350/1.2450 remains resistance to the up-side, but 1.2200/50 seems good support as well forming the low area for the last few attempts to regain the bear momentum.
In the current environment of trying to find the ‘least weak’ of the major currencies, the game seems to shift by the day. Oddly enough, even the resource-rich currencies are not guaranteed to be roaring away, with the Aussi Dollar only marginally above median value versus the Dollar of the last decade-and-a-half.
Oil has spiked higher again in the face of the upcoming Tropical storm season, but it must be warned that after the storm problems of 2007, it is unlikely that any current production platforms will be affected by whatever Mother Nature can thrown it them (barring a once in a lifetime event). Over the last few years ‘storm price spikes’ have been selling opportunities.