Back from my week off, and chaos remains the closest description that fits the current market conditions.

As mentioned several times in these comments, the Euro zone, whilst attacking the hedge funds/banks/speculators (in fact virtually everyone except the real culprits, ‘overspending politicians’), over-forcing the issue on sovereign credit worthiness, is not particularly bothered by a weakening in the Euro itself. Surprisingly, though, the French have actually stated the obvious and let the cat out of the bag, saying that a fall to parity versus the dollar was of no particular concern. It is believed that, on a purchasing power parity level, the Euro would be equitably priced at around 1.1650 (current price 1.1940) against the greenback. It was the move higher to 1.6000 through 2006 to 2008, as the world looked for an alternative to the dollar for a reserve currency, which has proved to be the real aberration.

Competitiveness for the weaker euro nations can only be achieved with a significantly weaker currency, and while Germany, France, etc will gain by default, it appears that the tail (in the form of the smaller nations) will continue to wag the dog for the time being. We are still in the ‘spend more money to prop it all up’ phase of the crisis, but at some point the North will have to at least pay some lip service to their domestic markets (i.e. voters) and tighten the purse strings. It is this future moment in time that is worrying the markets. A sovereign default from Greece would seriously impact the balance sheets of many European banks and it is this potential disaster that the politicians are trying to avoid. In this environment, it is not exactly surprising that Euro bulls are thin on the ground.

After the huge falls on Friday in the currency, equity, indices and Oil markets triggered by both the Non Farm Payroll and Francois Fillon’s comments (the French Prime Minister for those of you, like me, who have never heard of him), the markets are reasonably peaceful this morning, with further weakness in the US and European markets on the off but, at the moment, no appetite to push lower. Our clients are struggling to get much of a handle on direction, as every strong rally seems to be followed by and equally violent fall and as mentioned previously, sitting on hands seems to be the best policy.

The FTSE is back at the lower end of the recent range at around 5050 and there is some minor support at 5025, a bigger prop at 5010/15 and an even bigger one at 4975 (on a closing price). Hindsight is a wonderful thing and we can see that the failure to get above 5250 (or, in fact, manage to close much over 5200) in the recent rally was a signal that the move was precipitate. While the old 4950/5000 support holds good, traders will pick up stock around these levels, but dealers should be wary of an intra day break of 4950 AND a close below 4975.

Critical to the Index is the ongoing woes for BP as the continuing fallout, like the spill itself, spreads ever wider. The UK exchequer makes a truly humungous sum of money from the company in the form of corporation, dividend, income, VAT, fuel etc, etc taxes. As an indication of the seriousness for the UK, the loss of the dividend income and a flat year on the profit-front would soak up much of the headlined cuts announced by the Lib/Tory pact. And if the US administration really does bar the company from future deals, the long-term income reduction could be critical. If the company is seen as weak, it might even be snapped up by a foreign competitor, meaning a permanent loss of all of the above to the exchequer, i.e. back to square one on the budget-cutting front!

Gold weakened through Friday until right at the end of the session, as the volatility (and attendant stability fears) finally brought the yellow metal back into the frame. This said, the failure to challenge for the early May highs is slightly worrying and traders seem to less in love with the metal than in previous times of stress. Resistance to the upside is at 1218/20, 1226 and (of course) the highs at 1248/50. Near-term support is at 1210/12, 1205 and 1200.

Oil continues to rush all over the place and Friday’s near-five dollar range (mostly to the downside) has caused a bit of a ruffle in the perma-bulls feathers. 69.00/69.50 is good support and the bulls will be hoping that the recent action is building a short-term ‘double bottom’ formation with sub-70 dollars seeming to run into buyers. The repeated rejection of 75 bucks is also worrying though, and with the concern over the future viability of deep sea oil exploration on everyone’s minds, it does seem strange that there has been no reaction ‘buy’ to the Mexican rig blowout.