There has been something of a follow through from the initial rejection of the lows recorded last Friday and Monday but the jury is still very much ‘out’ as to whether this is just a bear market correction or an indication of something more. The plus side is actually rather a negative statement in that recent data is ‘no worse’ than expected. This might lead us into an argument concerning how much of the expected continuation of the downturn through 2009 and possibly into 2010 is already in the market.
With interest rates at below 1pc for much of the globe returns on equities are certainly attractive but the same argument could have been used for quite some time now and it has not exactly helped! The US markets have put on quite a turn around this week, 700 points on the Dow and 75 points on the S&P 500 from the Friday/Monday nadir and in hindsight (which is a wonderful view point for any commentator) the failure of the S&P to close below 675 four days in a row (from last Thursday to this Tuesday) was a possible positive indicator. The S&P has now recovered to be above the Nov 2008 low (but the Dow still has over 200 points gap) and traders will be looking for the potential of the 772/775 resistance and possibly for the real optimists the 800 support/resistance level. For the Dow there is a very obvious resistance to any move higher with the medium term falling trend line which is currently at around 7475.
For those with a darker view it is advisable to point out that we have had many of these solid looking bounces over the last 18 months and all have proved to bear a bitter harvest. Still… we can but hope.
Sterling remains in the dog house with whatever trend or momentum indicator you care to look at showing continued potential to the downside. The failure last Friday to push resistance versus the dollar at 1.4340 was not helped by the overall view taken about the ‘quantitative easing’ policy of the BOE. With no other central bank going down this route just yet we may find that our Government will have ended up buying its own debt off a few investment banks at what may prove to be the highest ever price for UK gilts. Which would actually make rather a neat end to the Labour Governments disastrous mismanagement of the UK economy. History might well show that Gordon Brown sold half the Gold reserves at the lowest (in value terms) price for Gold in history at the start of his regime and topped even this by buying £75 Bln of its own debt at the highs. At some point the government will have to stop buying, issue more or sell off the purchases and when the market gets wind of this you will not see a buyer of Government debt this side of Mars and the price will fall like a stone. Given that the BOE is buying Gilts some 5pc above the price last Wednesday and on a comparable basis will probably have to sell at a price at least 5pc below that level we are probably looking at a loss on the deal of some 10pc (or 7bln pounds) for the taxpayer. A price worth paying if it works… if it doesn’t …just another few pence on income tax.
The rally in the US and Far East markets yesterday and this morning is working it magic on the FTSE and we are looking at an opening of around 3775 up about 60 points. The senior UK index did not actually suffer quite so much as many of the world indices during February but this is being matched by the fact that it does not seem to want to rally quite so strongly on the rebound. The Dax was briefly trading underneath the FTSE towards the end of last month but is now 230 points to the good. The German index is running into resistance at 4030 the lows o October and November and a rejection of this level could send it down quite sharply. On the other hand a renewed move higher with a close above this point might be taken very favourably by longer term players who remain on the sidelines at the moment. For the FTSE several resistance levels have already gone by the wayside and the important question will be “can we remain here or higher” and build some kind of support or will the moves of the last 4 days come to nothing? Time will, of course, tell but as with quite a few comments of the last few weeks it must be pointed out that there is good value out there IF (and only if) investors can live with any downside.
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