Markets across the globe continue to rally even as the thunderclouds seem to be building once again. Of course one of the fundamental reasons for this is the actual value of money itself (in which all assets are valued). As governments across the globe print ever more money to try to keep the whole structure going for one more turn of the starter motor in the hope/expectation that this will get the engine going again the actual value of dollars, pounds, yen etc continues to fall versus other physical assets.
Gold is the main embodiment of this but equities and land (in the UK) are just as good an example. The UK economy is still in deep trouble and unemployment continues to rise and yet, in sterling terms, property and equities have had a very good year indeed. But if you compare the performance of these items against something other than Sterling itself (for instance Gold or the Euro) we can see that the FTSE and land values have not done much better than stand still.
For those of us who have had the misfortune of stumping up for meals, car rental, hotels etc in Euroland the cost differential between consumer goods in the UK and our continental neighbours is becoming extreme. With the economy unable to take price hikes at the moment the pressure is being felt in margins as small businesses ‘price to survive’ rather than profit as is shown in the slump in tax revenue numbers. These price dislocations seldom survive for long and so it is not dramatic to expect that either the Pound will have to sharply increase in value or inflation will begin to bite. The government (with huge fiscal deficits to deal with) will presumably be hoping for a mixture of the two as inflation has always been the favoured way of reducing state fiscal liabilities while a stronger/stable Pound will facilitate the selling of the vast quantities of gilts needed.
The fall out over the Dubai news has now been well and truly discounted but one does worry as to how many similar situations across the globe are just below the surface. The Middle East has its oil revenues to shore up any shortfalls but many states are dependent to a huge degree on western consumers. With taxes likely to rise (in one form or another) and state spending likely to contract a very large burden may well descend on domestic demand in the emerging markets to mop up excess production. We must hope that they have the economic strength and momentum to withstand this.
This morning sees the FTSE up another 50 points as we press towards the highs of 6400 and clients are once again setting up shorts at current levels hoping for a move back to the 5250 to 5300 range.
Mining, Telecoms and Oil continue to drive the index higher while Banking seems to have had its day in the sun and is now suffering under the glare of massively increasing regulatory oversight and capital requirements.
Unfortunately for the banking sector our Lords and Masters do not seem to know what they want. One day exhorting banks to lend to all and sundry and the next berating them for not being ‘prudent’. The straight jacket of euro red tape seems to be rising on an almost daily basis but, whilst nobody ‘loves’ banks, the fact remains that they are the oil of the whole western economy. You cannot buy or build anything without involving a bank at some stage. Fettering our financial sector with state inspired regulations is a disaster waiting to happen.
As mentioned Punters are looking to get short at current levels and who can really blame them as the high 5300’s have proved something of a watershed two or three times already this year.
Gold has reached $1226 this morning and our clients continue to buy, the never ending rally in precious metals shows no signs of petering out and dealers are not discouraged at all by the heady levels. The target for the ultra bulls remains 1400 and this is a good deal closer now that when it was first mentioned but it must be mentioned that it is getting a bit cold up here and we must wonder at what point the product will run out of oxygen to fuel the rally.
Currency markets whilst appearing to be moving all over the place remain pretty much in the same area as they have been in for the last few months. Yes, the dollar index weakens all the time but versus the majors it seems to have stopped moving.
Cable is now at 1.6650 and we keep returning to this point even though we always look like breaking higher or lower on a week by week basis. At the moment sterling seems to be on the way up versus the greenback but even this morning we have already had a pop at the region above 1.67 and (once again) not found it to our liking.
The Euro is holding above 1.50 rather more comfortably that in recent times and any weakness seems to bring out the buyers. We still seem to run out of buyers above 1.5140 but the old resistance at 1.5040 / 1.5060 is now turning into support and may contain any sell off.
After the huge four big figure move in the Yen last Thursday/Friday the dollar has tried to regain some of the lost ground but is still (even after the suppressing of the Dubai problem) below the major support around 88.10 to 88.40. Traders will be watching to see if this level is recovered and (if it is) this may lead to a bigger rally for the greenback back to the 90.00 area.
Oil remains subdued (considering everything else that is going on) and 80 bucks now looks a difficult barrier to overcome. With other asset classes having a whale of a time it would not be unreasonable to be expecting black gold to be following suit. We have mentioned a few times recently that this lack of vigour is worrying (especially as the dollar has been weak) and we are seeing rather more sellers than has been usual. This said, anything under 75.75 has brought out almost frantic purchasers and dealers are (as with many other markets) getting to know and love the range.