A grim day on the markets but (for all the weakness) there does not appear to be much of a follow through. The FTSE fell through a series of supports in a day of steps to the downside to close near its lows but in truth there seemed to be no feeling of panic that we were about to launch on a renewed period of weakness and the poor performance was pretty much universal rather than picking on one unfavoured sector.
Today sees the index opening almost unchanged having been called considerably lower in pre market action as investors take stock for the morning session and are initially deciding that yesterday was a tad overdone. The green shoots of recovery are still to be seen but the probability is that the corporate profit side of the equation has yet to reach its nadir. As employment dwindles margins are likely to be squeezed for some considerable time to come. The question remains what will be the outlook when the economy finally turns and unfortunately the answer, currently, appears to be that we will endure many years of grindingly disappointing numbers as the disaster that is the public finances seeps its way through the numbers.
For companies that are primarily focused on the UK (and remember that some 70pc of FTSE 100 business is non domestic) this will possibly mean years of under performance.
Anyway, that is for the future, today the argument is over whether the FTSE will continue its recent decline or whether the buyers will make a foray. There has not been a serious pull back in the markets since the turn of early march and we have been due something of a retracement. The breaking of the upward support trendline on the 15th has turned into a concerted move lower and this is as good a piece of evidence that you are likely to see that following technical data can be remunerative. The 4200 level represents a good approximation of the middle of the trading range since last October and there is a reasonable possibility that this return to the middle ground will become a feature of months (maybe years) to come. At the end of last year (just before Christmas) along with a number of other, rather more respected, commentators I was asked for my expectations for the end of 2009. The wide spread of answers was instructive some picking on 3500 some at 5000 etc. My answer was 4250. When challenged, as I was a long way away from everyone else, my response was simple. “That was where we were at the time”. With the year nearly half gone we are pretty much bang on the mark.
Support is likely to arise just below the 4200 level at around 4180 which, if tested, could see further weakness but there is continuous volume support all the way down from here so it will take a considerable amount of effort to force the issue. The easier route is back up to 4260-4280 and we may expect a small recovery to these levels.
The pound continues to oscillate between 1.6200 and 1.6550 with the markets testing the lower end of this range this morning. As commented last week the currency markets (especially sterling/dollar are becoming ever more popular as the trading ranges seem to be almost guaranteed. Every day is seeing at least 200 pips of tradable spread (often over 300) and with the current range looking set in stone punters are making hay in the summer sun.
Oil has retreated from the 72 dollar level and is now back at 66.50 (August Brent). There is some support at the 66 and 65 buck levels but it must be admitted that the current weakness has a good chance of creating its own momentum to lower prices. The fact remains that there is not a dearth of the black stuff out there and any further weakness in the US and Western economies may well trigger a further sell off. While we all talk about the new wave of demand out of the emerging economies a little piece of information might be instructive. The reduction of Oil consumption in the US this year (some small percentage) is equivalent to the entire consumption by India. Even if the sub continent doubled usage overnight it would not match the potential reductions of the major industrial nations.
Gold continues to weaken although there is support bang on the level we are currently trading ($920). As the indices weaken it has been usual to see gold benefitting from the fear induced but this time we have seen only selling. Has gold lost its sparkle? Probably not yet but with so many high yielding areas to invest in it remains the last port of call for the extreme pessimist.
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