What traders must try to avoid is extrapolating what politicians say when they are trying to get elected from what they actually do.
Monsieur Hollande is very unlikely to implement some of the more aggressive statements in his manifesto. Taxing people 75% above €1m euro would impact tax revenue and employment numbers very negatively.
People should be aware that the bulk of big earners are not in financial services. They are in the vast array of private companies that proliferate across the European landscape. Taxing the earnings of such people would drive investment out of France into more accommodative countries across the globe. The basic question you have to ask is “why would anyone invest, work, risk capital or time, only for the state to take the vast bulk?”
A financial transaction tax would almost immediately drive such business overseas and, whilst people say “so what, financial trading is ‘socially useless’ anyway”, this in all probability would also mean moving the capital behind the trading overseas as well. This certainly would impact on broker/bank balance sheets. It is not as though either the UK or Germany is a million miles away.
On the other hand any attempt to implement some kind of Expansionary Austerity certainly would set markets on edge. Soft Austerity is just another way of saying “do nothing and hope something turns up”. I am afraid that the woes of the Euro zone sovereign debt situation are well beyond this. One of the major problems is that Government expenditure seems to be a virtually un-slayable beast. Companies appear able to actually cut or at least stop expenditure in not just ‘real terms’ but in actuality. But a huge swathe of government outlay (benefits/pensions/capital expenditure) is fixed versus inflation or other factors. To impact outlay would mean a combination of actually cutting salaries and final pensions (even those of people already retired), slaying the dragon that has become the health budgets and maybe deciding that we don’t need to involve Europe in solving the World’s problems.
This said we all know that politicians will continue to make the easy choices until the choice is effectively taken away from them (Greece, Spain, Italy and Ireland), and Hollande risks falling into this camp.
Today sees a bit of a pull back in markets and it is difficult to argue with this. In the current environment the simple route is probably the wisest. The Major European markets are still up nicely on the year so it is not cowardly for investors to pocket some return, take the chips off the table and await events.
The markets had a bit of an exciting opening yesterday as the Far East reacted very negatively to the Euro Elections. Throughout the day some bargain hunting held sway as investors pondered whether anything would really change and ended higher than the close on Friday. Today is seeing a reaction with the Dax sitting just above the previous support at around 6500/10, currently quoted at 6524/25, and technical traders will be looking to see a test of this level. On the up side 6570/75 and 6590/6600 are the hopes for the bulls.
The FTSE, in all of this, remains at the lower end of the years trading range (effectively 5550-5975) at 5635. There is little to really go for in either direction but our clients are getting long in anticipation of a potential confirmation of the range, with the possibility of a move back up towards 5800 and beyond. Only a close below 5550 might change this opinion.
On the currency markets the Euro is starting to fracture a little at the edges but the fear remains that a break up of the periphery might actually increase the value of the Euro as the weight of Germany would no longer be counteracted by the weaker members. For the last few years the effective range has been 1.20-1.46 versus the dollar so meandering around 1.30 and 1.35, as it has done for the last four months, puts us pretty much in the middle of the game. If the Eurozone staggers on into the middle distance building up huge liabilities then the prospect must be that any currency weakness will not be able to accommodate the fiscal burden, whilst politicians try to hold on to their expensively created edifice at all costs. The Garlic belt cannot afford to remain or leave at the moment but the North has an even bigger problem in that they are mortgaging their present for an unquantifiable future.
For the meantime the support is at 1.3000 and 1.2965/75 and then 1.2865/85, on the upside resistance is at 1.3068/78 and above this at 1.3140/50. The longer and medium term falling trendlines are currently around 1.3250 which will be watched very closely if we do manage a rally.
Sterling is currently a general gainer in all of this as money moves out of Europe looking for temporarily less volatile regions. Versus the Euro the pound is now at a three year high but the 1.2400 region proved a high watermark in 2010, and so we have been seeing speculative selling here from our clients with stops above 1.2450.
Gold also remains in recent trading ranges albeit near the bottom. For those of you who love long term momentum the last two big rallies have both failed to make new highs, which has not really happened for a very long time. It seems as though previous peaks are getting harder and harder to overcome. This said there also seems virtually no appetite at all in selling below 1600. With the price at 1626 we can anticipate buyers coming in very soon. Whether they will achieve the same result as in the previous attempts will be interesting.