Weekend press was quite mixed but the overall impression felt as though the dark clouds might be gathering once again over the growth in the developed countries.
Sad as it might seem the impression gaining weight in Europe appears to be that all of the ‘extra stuff’ afforded our citizens and built up over the last three decades is now at risk. Even Labour is struggling to justify the vast amounts paid out to people who effectively sit on their arses for virtually their entire working lives. The next decade may well see a massive retrenchment of social welfare across much of Europe as revenue receipts fail to match outgoings. Oddly enough the US (even though they are the wealthiest nation on earth) will probably adjust to this new economic reality as they have never been particularly ‘touchy feely’ over their economically inactive citizens. The increasing numbers of the ill-educated and socially exclusive (from an educational, religious and wealth stand point) seems to be worrying more and more of our ruling elite. The response to these problems in an environment of higher taxes and poor employment prospects over the next five to ten years will probably be increasingly harsh.
The fact is that, in the UK, Social Welfare now costs the government more than they receive from income tax! Put simply this means that all the revenue from all the people working does not cover the costs of those who do not. The difference is made up from VAT, corporation Tax, Fuel duty, Alcohol taxes, rates etc, etc, etc…
Ah well … back to the markets.
The FTSE has tried to open higher this morning but selling pressure has immediately been in evidence. Some of the corporate cash calls are having to be pulled as it seems the appetite for stock is not quite as good as has been thought. As we enter the third quarter reporting season there is a natural worry that corporate announcements will not reflect the optimism of the markets over the last four months. With profits to be had for many buyers since this time last year it is not a difficult conclusion to speculate as to whether many investors are finding discretion to be the better part of valour.
As mentioned on Friday there is support from 4980-5020 and then down at 4930-4940. We seem to be finding it easy to sell down to the bottom of the first range but cannot (for the moment) approach the second. Clients are buying the indices as I write hoping for a repeat of Friday where we oscillated around the 4975 to 5010 for most of the session after a brief foray lower on the worse than expected Non Farm Payroll data. For all the vast sums being spent by President Obama the net effect right down at the bottom line seem to be still difficult to judge. For the sake of the economy as a whole we must hope that all the stimulus does not fizzle out into a damp squib. For those wanting a continuation of the bull move the charts would suggest that we had better stay above 4940 and hopefully regain the 5050 level soon. The longer we stay below this point the more ‘attractive’ will become a return to the range between 4600 and 4800.
On the currency front we have seen some early morning weakness in the dollar but this is now reversing, at least versus the Pound, as confidence in Sterling remains fragile. Cable briefly pushed above 1.60 in the small hours but is now down at 1.5930 again as Europe seems to have become ever more UK negative. The cross is becoming more vulnerable once again but there does seem to be good support below 1.5800 down to 1.5760. A bit away from the current price but at least of some comfort to the dwindling band of Sterling bulls. The Euro continues to look strong versus the dollar and the recent pull back failed to dent the upward trend line. Powerful resistance remains from 1.4850 up to 1.4960 but the current price of 1.4620 is some way from this point. Support is solid at 1.4475 but it is difficult to go against the momentum of the moment.
Gold …. Is stuck around 1000 (still) and we appear to but well and truly marooned between 985 and 1020. Until one or the other goes the smart money is just playing the range.
Oil, up one day down the next. Supply seems ok and if inventories continue to be strong there is no reason to suppose that the recent highs will be challenged. Unfortunately, though, it is never as easy as this as momentum in either direction has a habit of getting out of hand. For the last four months every move in one direction is swiftly followed by an equal move in the other. While the strong upward momentum, in place since February, has now been defeated (back on the 23rd Sept) there was no real follow through and we are still smooching around the mid point of the trading range in place since the end of May.