Markets are slipping away from the highs of last night in early trade as the euphoria over expected rate cuts begins to drain away. The FTSE is still some 600 points above the lows of last week and so can be said to have a reasonable cushion before we all start the “wailing and gnashing of teeth” once more.
The failure of the index to break above the 4370 level (which was the high on both the 20th and 21st Oct) was slightly disappointing as we ran out of steam at 4363 but the reaction to the failure to the downside has not been too extreme so bulls will be hopeful of a return match before long. There is also a steeply falling short term trend line resistance built up since the 19th September which is now at around 4330 (so steep it is losing about 35 pips a day!). An attack on this over the next few days might also be the trigger for another blip to the upside.
Conversely, the signs on the economic front continue to worsen with House Sales bumbling along the bottom, the US recording 0.3pc contraction in GDP (slightly better than the UK even though the crisis apparently kicked off over there) and Retails Sales continuing to weaken. For all the repeated statements that the UK is in a favoured position to fight off a downturn the numbers are beginning to point to an altogether different conclusion. Of course the FTSE 100 business make up shows that some 70pc of the revenue of its constituent parts comes from outside the UK so the actual stock market might perform better than the real economy from this point.
From the currency bunker the pound is slipping versus the Yen and Dollar (as is the Euro) as dealers focus once again on the potential for rate cuts from Euroland and the UK as opposed to the already enacted cuts from the US and Japan. The likelihood is that Japan and the US will not reduce much more from current levels (it would be difficult as they are already at 0.5pc and 1.0pc respectively) but for Europe and the UK there is quite a bit of fat to go. Currency traders tend to focus on immediate potential rather than look to the situation AFTER the expected has occurred. If we can just break up the Cabal of Economists that makes up the MPC and replace them with a few business and (maybe) political leaders I would be more optimistic of a better future rate policy.
Sterling continues to wing all over the place and has already had a three cent range this morning (from 1.6435 to 1.6118). The beauty for dealers here is that there is huge room for manoeuvre on the up side before there is any impact on the overall downward trend. Technically the Cable cross could get all the way to the mid 1.90’s and still be in a medium term bear move! That said the bears will continue to have the upper hand when it comes to ‘speed of movement’ in that the moves to the downside will, probably, be faster and deeper than those to the up.
With equity markets (and money market liquidity) looking just a bit more sanguine precious metals prices might come in for some more downward pressure as flight to safe haven potential begins to drain away. We haven’t had a banking crisis for all of two weeks now(!!) but the attraction to the dollar remains in place both of which could act against the bullion market. Oil is also sluggish again after the OPEC inspired rally of Wednesday ran into further selling yesterday and this morning. The world has seen past evidence of pathetic attempts by the OPEC cartel to rein in production and traders see no reason to expect that this time will be any different. If the price remains at the current levels for some time the temptation to pump “just a little more” will become extreme as State coffers begin to dwindle.
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