Non- Farm Payroll came in substantially worse than forecast and the prior month number was also downgraded which generally sums up the fears expressed by Bernanke et al over the last few weeks. The oft re-quoted message of the last couple of years of a ‘jobless’ recovery seems to be coming to pass but while this is of concern to governments the stock markets seem to be sanguine about the prospect.
Most companies have now downscaled workforces and capacity to reflect the new situation and we face an ongoing situation of reasonable corporate numbers (although not stellar) coupled with an ever widening gap between the ‘have jobs and likely to retain them’ and the newly unemployed who will probably struggle to get back into the stable employment situation they enjoyed in the past. Companies that rely on the marginal levels for profit will no doubt struggle and in the UK retailers are likely to be in this group until such time as they can cut down floor space to match the demand (especially with the public sector cutback in the pipe line). We might have seen some headline slicing of the PSBR but the press has been curiously silent (as have the politicians) over the fact that even these swinging cuts do not actually reduce the debt level, they will just slow down its rate of increase. Unfortunately we are relying on growth (and, whisper it quietly, a bit of low interest rate inflation) to reduce the overall GDP/Debt ratio. If we now expect growth to be substantially lower than hoped the UK risks a very real interest rate on debt burden in the coming years. We are still running at a £10 bln surplus a month, if we actually got all the spending reductions now we would still have a £5bln/month increase in the total.
This morning sees the FTSE up at its highs since May and our clients seem happy to sell above 5400 as they have done so many times in the last few weeks. At some point we will break higher (probably) but 5405/5415 still remains a resistance level until it fails. The Dow, S&P and Dax are similarly just under major resistance levels and it would probably take just one piece of good news to take us through to a new range.
The weak employment numbers have helped to continue the poor dollar outlook but it must be questioned that if the US is struggling then can Europe be far behind. The surprising UK Q2 GDP increase may have given a false sense of security as even I am noting how quiet trains, shops and roads seem to be just at the moment (although this will have a summer holiday factor). The dollar has fallen over 10pc over the last month or so and, while the rally was equally strong in the first half of 2010, this does appear rather overdone given all the information on the table at the moment. The woes of Europe seem to have virtually disappeared from the headlines (almost as if they never happened) and the summer break seems to have worked its magic. As virtually every major European player (both political and financial) has been on holiday for the last month or so news has focussed on the one country that never seems to take a break (the USA). As we drift towards the end of August this hiatus may draw to a close.
The Euro is now at very strong resistance levels from 1.3270 to 1.3340 and traders will be wondering if the one way trade direction can be maintained. Since early June we have rallied from 1.19 all the way to 1.33 without a single reversal of more than a couple of cents. This is highly unusual which is why traders continue to try to pick highs or read into even the smallest move lower rather more than is actually the case. So long as the rumours persist that the Fed is going to reignite its stimulus packages the Dollar will continue to suffer but we should not be too sanguine about this as Europe and the UK may well be forced into postponement of their proposed fiscal breaking policies.
Gold has definitely given up on its bear attempt and the bulls (of which there seem to be enumerable numbers) are sitting pretty once again. The resistance at 1212/14 has held again though so the bears will be also hopeful of a repeat performance of recent times and all eyes will be o 1202/04 and then 1196 on the way down.
Oil reacted to the NFP numbers as well but ran into the brick wall of the $80 support level late in the session. We are now in the mid 81’s and seemingly stuck between 80 and 83. With the equity markets currently looking so sanguine it might be dangerous to be too aggressively short but dealers will also be nervous of an overall failure at current levels as so many markets look to be at critical points.