A difficult day yesterday with the markets seemingly not able to move one way or the other and while today is opening up brightly the FTSE is struggling to make it above 5160 which was the failure points for both Tuesday and Wednesday. We are seeing heavy selling on the off at above 5150 which, to be fair given the resistance in previous sessions, is a reasonable enough action on the part of our clients. There should be an awareness though from sellers that if we do establish a foothold above 5160-70 then they should beware a sharp move higher as weak sell positions may possible be forced out.
Oddly enough the wrong markets (!?) seem to be going up in tandem. Gold is forging up (normally a harbinger of doom and disaster in one form or another) while at the same time Bonds and Equities are surging and Oil is stuck below 72 bucks. The natural argument is that the dollar is weakening and it is this that this aids the dollar price of gold but even a 1pc move in the value of the Greenback only translates into 10 bucks on Gold so this cannot be the whole story.
Various Interest rates across the globe have started to tick higher (mainly of course from resource rich exporters) and this is being taken in some quarters as the real signal of the end of the recession. The West, though, risks being left out while the Far East roars away as domestic demand finally takes off and absorbs more of their excess production capacity. The Euro is very strong at the moment but this might well be a short lived phenomena as, while some European states are in a better position than the US or the UK, this is by no means universal and in comparison to the booming industrial units globally the cost base and taxation levels over here are not conducive to long term competition.
Here we might again look to the longer term potential for the US vs Europe. The US has, to a certain extent, the ability to ‘reinvent itself’. Not easily of course but in a world of changing power and economic bases it is less likely to find itself dragged into the mire by huge social bills prevalent in Euroland.
Mining stocks have surged on the moves in copper, gold and Alcoa’s earnings numbers. Employment numbers in Australia moved higher as well (Mining) as demand for virtual every natural resource surges. The future for ‘God’s Country’ does look very bright indeed! Rio Tinto is currently back above £28 marking a new high for the year and in fact the highest since last September but the real test will come form their ability (as with the other miners) to turn undoubted increasing revenue into profit. Costs of extraction are getting higher (especially with the weaker dollar) and nation states are getting greedier. Not only this but there is always the possibility of ‘windfall tax’ charges from a cash strapped government (the Tories are not above doing this either).
As mentioned earlier the market that seems to be missing out on the big moves is Oil. While we are up at 70 bucks this is pretty much the level of the last four/five months and. as every other asset class has been surging in expectation of a turnaround. the one market that many would think of as being the proof of an increase in activity is still stuck at the same old level. The trading range for Nymex remains (roughly) 66 to 73 and punters with patience to wait for either one or the other of these two are being rewards very handsomely. Of course (rather like Gold) when a break does happen it is likely to be violent but it is anyone’s guess as to which way the decisive move will be. Our clients remain short the black stuff from higher levels and while we remain under 73.50 it is difficult to argue a different case.
Sterling remains weak on a basket basis but has made it back above 1.60 once again versus the dollar. While the general consensus is that the Pound is a pile of pooh the Dollar also has its detractors and it has not been helped by the rumour that the Chinese and Ruskies are once again looking at moving away from the greenback (although the idea that Russia and China would trust each other more than the US over the long term is probably stretching things a bit!). Versus the Euro (which still has the higher interest rate!) Sterling is definitely looking to be the poor relation. This havng been said though there is solid support in the low 1.08’s down to 1.0750 and this has held well over the last few weeks. A break below 1.0750 may well be the next trigger for a move to 1.050 and (of course) the dreaded parity of 1 to 1. My last holiday on the continent was eye-watering enough when rates were at 1.15. At 1.00 the wallet would be positively whimpering.
Dollar/Yen is right back down at the massive 88.00 level and investors will be wondering as to the impact if the markets can hold a close below this mark. We have traded twice under the level back in December of last year and January of this but on neither occasion could we hold for more than 24hrs. The reaction both times to the failure to hold was quite extreme with the bounce in December taking us to almost 95.00 and the January retracement eventually petering out at 101.00(!). The charts look to be pretty much one directional (down) but technicals do have to turn at some point whether it is now does not at this point look likely although our clients are buying Dollar/Yen in quite some size hoping that the support holds. This is not an unreasonable trade idea but as with the FTSE traders should be quick to get out if the reverse looks to be happening.