So we begin a new year with both hope and trepidation in pretty much equal measure.

The hope comes from the possibility of another good year in the markets and the trepidation comes from the perception of the almost limitless ability of our political leaders to put their own self preservation ahead of serving their country. Virtually every decision taken over the last year or two has had the word ‘populist’ in front of it and one of the very real fears is that this administration has finally dealt a death blow to the one arena in which the UK could honestly claim to be a world leader. Financial Services.

Much as the ill-informed might despise the City the fact is that the money earned by the 300,000 workers in the square mile pays for a hefty slice of the public services that the rest of the country ‘enjoys’. Unfortunately the equation seems to have finally slipped against the Banking sector from both a regulatory and a taxation standpoint. Two big US investment banks (there are a couple left!) have now either curtailed new investment in the UK or questioned their entire existence on these shores, Hedge fund managers are departing in droves and even some of our high street banks are questioning whether the UK is a suitable place for their listing. Again, the ill-informed will cry ‘good riddance to bad rubbish’ and it seems our politicians will continue to pander to this perception ………until the piper comes to be paid, at which point cuts in services, tax hikes and falling credit worthiness will bring home what we have lost. Merely making people unpopular will not destroy them…lawyers and estate agents are bogey men of the past who remain with us to the bitter end…but bankers very raison d’être is making money from money and their particular dark art can be performed from anywhere on the planet (preferably somewhere stable). Unfortunately, again, the UK has become a common sense free zone where their profession is concerned.

What can we expect this year?

Stock Markets are quite well valued at the moment but equities continue to give better returns than virtually any other asset class (although this might not, of course, mean very much) but the recent weakness in the Gilt markets is starting to place more attraction towards bonds.

Commodities look pretty much a one directional play with the Far East looking to soak up virtually anything dug, drilled or sucked out of the ground.

And currencies bash one way then the other as the attractions of the dollar wax and wane on almost daily basis.

The problem is that much of what is written and speculated on comes with some massive health warnings from the point of view of the UK.

‘If’ Britain sinks into an Italian style public sector debt spiral to add to the massive private sector debt pile then a whole new Pandora’s box of problems will open up for us. Sterling, after falling heavily in H2’08, has actually been quite resilient for the last 12 months swapping periods of weakness for phases of strength but, with an election due this year and with Growth and Tax revenue numbers continuing to disappoint, the pressure may well start to tell once again. On the plus side for the currency the markets are starting to speculate on inflation rearing its head (it is already close to the BOE’s 2pc letter writing level) and this is likely to drive rates, across the curve, higher than the other major currencies, the 10 year Gilt is already above returns available from Italian debt.
This writer has been informed (correctly or not I do not know) that the VAT man, whilst indeed hiking his slice back up to 17.5pc, has been allowing deferments in payment on a truly Herculean scale and one is forced to speculate on whether the failure of the unemployment rate to rise in line with the GDP fall has more to do with this than with the resilience of UK plc. A temporary 15pc hike in cash flow is always helpful!

Today sees the markets on the up and, as mentioned last week, this is not exactly surprising as the first day of virtually every year seems to be positive as funds look to place at least a bit of their cash pot (if only to avoid the accusation in December 2010 of missing out on a huge year long rally in its entirety!). All the equity markets are still well within their year end ranges and it is tempting to speculate that little will change in the first part of this year to break this trend. Punters have been quick to counter any weakness or strength and we can possibly expect a continuation of this style of trading activity for the time being.

On the commodities front Oil has broken above 80 bucks for the first time in a while but we are not seeing much in the way of selling to counter the move. Resistance is all the way from the current price (80.50) up to 81.50. The oil market has had eight up days in a row which is spectacular even for black gold and bears have been somewhat trampled in the rush. Gold is also surging having failed to break below the major support levels and there is a small feeling that the gold bugs are looking for the new year as another platform for an attempt to regain the initiative.

The fact is that cash (which had been king in the back end of 2008 and Q1 2009) is now struggling, in the face of the printing presses of the western economies devaluing its worth, to recommend itself to investors. Better to have money in almost anything else seems to be the call.