Financial Market Comment 21st April 2009

Oh dear.

The failure of the S&P, FTSE and Dax to breach the resistance levels on Friday or yesterday morning was the initial trigger for the weakness but the ensuing falls were accelerated by BOA’s worse than forecast losses and a strong feeling that the low volume rally over the two week Easter period was built more on hope than expectation.

Clients made off like bandits in the drop holding onto shorts (mentioned in yesterdays little message) all the way to the bottom and then managing to get long right on the turn. The favourite came in once again much to the bookies woe.

While the market is fragile the fact is that neither the fall yesterday nor the rally that preceded it are particularly indicative of longer term prospects. We are likely to see a continued oscillation around current levels (maybe a couple of hundred lower and a couple of hundred higher) through the medium term. Valuations will remain under pressure as we await evidence of a ‘bottoming out’ of the current economic weakness but buyers will, conversely, continue to pick up stock in anticipation of better times to come.

With the budget out tomorrow there will probably be a slew of comment on the personal level but equity markets have come to almost disregard the annual bun fight in recent years. Mr Darling will have precious little of comfort to say but investors will be wary of yet another stimulus today to be paid for tomorrow.

The UK risks entering a spiral of higher public debt and lower tax revenues especially from the corporate sector. Many of the FTSE 350 companies could move abroad for tax purposes if the tax regime looks to be moving disadvantageously (and this includes personal taxation levels for senior executives). Hiking top rate tax to 45pc makes for great sound bytes but might well prove to be very counter productive.

Sterling has now given up much of the rally versus the dollar built over the past few weeks. Yesterday saw the small short term up trend broken when we fell through 1.4600 and this morning’s action is not exactly encouraging either. Rumours that the Chancellor is going to forecast a 200bln deficit for this year have unnerved currency markets but this is not the whole story as the Gilts managed a spectacular move higher throughout the session as the next Treasury buying spree approaches. The quantative easing model causing the current dislocation in valuations on UK debt will, presumably, finish some time in the second half of 2009 at which point Gilt markets will probably fall massively but for the time being the investment banks are coining it in.

Sterling weakness over the last few days is worrying for many reasons, not least the impression it gives on the market’s confidence in this administration to deliver anything remotely useful for longer term solutions. Unfortunately UK plc is probably going to suffer for the chronic economic mismanagement of the last decade for the rest of my working life. As the UK seems to be run by people who define success as a good headline the chances of any remedial medicine being immediately proscribed is virtually nil. The bitter pills will almost certainly be delayed until after the next election which may well be too late. Currencies generally reflect buying power across the globe and occasionally over reach themselves as trends move too far in one direction or the other. While, on the face of it, the pounds recent demise (over the last year) looks to be precipitous it would be a brave finance director who did not cover against the weakness continuing.

Gold responded to the equity weakness in its usual fashion with a strong rally but it is still struggling to get back over $890 let alone $900. If stocks continue to drop then the yellow metal should start to regain the higher ground but if we now potter along at the new levels in the indices the effort to move higher might well prove too much. Traders are watching for sins of a breach above the resistance and will undoubtably get in on the back of any such indication but at the moment we are seeing a lot of two way business as bulls and bears fight it out around the 890 region.

Oils slump continues this morning but it would be advisable to note that we are still in the trading range of the last month (there was a similar sudden drop towards the end of March) and support 47.25 is the critical point. At the moment the drop is just a range move and traders do not seem particularly concerned.

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Simon Denham is COO of London Capital Group and Capital Spreads. We do not endorse the information and analysis available in this comment and it is provided purely for information purposes only and is delivered as a personal view by the writer. Under no circumstances is the information in this comment to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. The investments referred to herein may not be suitable investments for all persons accessing this page. You should carefully consider whether all or any of these are suitable investments for you and if in any doubt consult an independent adviser. We accept no liability whatsoever for any direct or consequential loss arising from use of the information on this web page. Please see our Terms and Conditions.

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