Markets are sitting uncomfortably at the highs as finance leaders try to achieve a united front in response to the Global turmoil. Comments from regulators such as Lord Turner that what we need is ‘more oversight’, ‘more restrictions’, ‘much higher stress testing’, ‘higher usage of capital against off-balance sheet exposures’ etc etc make for great sound bytes until you realise that this means ‘more costs’, ‘less lending’, ‘more costs’, ‘less lending’ etc etc respectively just when world leaders are trying to get the financial sectors to open the purse strings.
And this leads to the great catch 22 over the current system. The various political leaders want banks to lend more (at virtually any price or risk) while at the same time blaming those very same bankers for inappropriate lending decisions in the past and the regulators want them to lend more responsibly whilst at the same time requiring greater capital use against existing and future lending. I am afraid that the numbers just do not add up.
Much of the world does not understand this dichotomy but is willing to just castigate the bankers as the architect of all our woes. In the absence of liquidity perhaps more people might start to ask how much of the growth of the past decade was actually driven by the banks lending rather than any policy decisions made by politicians? We all benefited from the huge surge in available funds and now we are all suffering on the downside.
Europeans are coming in on the buy side as hopes over some reasonable policy response continue to grow and the FTSE is called at over 3800 up 60 pips at 3815 in pre-market activity. Barclays has announced that trading for the start of the year has been strong and has mooted the possible sale part of its fund management section for around 4 to 4.5 billion sterling which for a unit holding 300bln of assets seems a tad on the cheap side but it must be said that the company cannot be said to exactly be holding a strong hand at the negotiating table!
Traders will be encouraged by the continued strength across the board and the likelihood is growing for increased signs of some toe-dipping by the major players as doom and disaster in the financial news fails to translate into further weakness. That said, it is not exactly wise for long term investors to pull on their buying boots just yet, maybe just put on a pair of ‘nibbling slippers’. 3800 in the FTSE proved something of a solid support on the way down with repeated attempts at a break failing to make headway (until the decisive move just a few weeks ago on the 2nd March) and we must beware the same thing happening on the way back up.
Longs will be keen to take any profits they can and we may well run into selling pressure on the open this morning but shorts should be few and far between just at the moment as if the rallies across the Far East are replicated in Europe we may have some further impetus for the buy side.
There are also other reasons to be slightly more cheerful with OPEC deciding to hold production levels once again which should remove immediate pressure for oil price hikes but it must also be noted that Saudi has restated its ‘target price’ at around $75. Saudi Arabia is the biggest player (along with Iran) and it must be mentioned that in such a restricted playing field that “what the big boy wants” should be recognised as what he will eventually get! On the downside though (there are always two sides to an argument) the creep higher in 3mth Libor vs the base rate is becoming ever more evident. There is a chance of a return to the liquidity crisis of 2008 which would just about be the final nail in the coffin of many struggling sectors of the economy.
Trailing in at the back is the ‘actual economy’ … as we are experiencing it on the front line. While the employment numbers continue to disappoint it must be said that the middle and low cost arenas seem to be doing reasonably as those still in employ enjoy the substantial reductions in Mortgage costs filtering through into their wallets/purses. The ‘big ticket’ items that entail loan requirements are being delayed or curtailed entirely but day to day expenditure is holding up. Yes, expensive eateries (Gordon Ramsey etc) are suffering but trying to get an immediate table at a reasonable price in my neck of the woods is still proving difficult.
On the currency front the pound is taking back some of its recent losses but it must be said that there still seems a strong bias to the sell side especially versus the Euro. For many readers this seems strange as they will be aware that Euroland has its own unique problems that are certainly not helped by the current strength in the Euro itself. Talk of a break up of the bloc are probably way wide of the mark as it is very difficult to see how any nation could recall all its cash in circulation and issue new negotiable currency. Are notes printed in Italy/Spain/Ireland actually their obligation or would they be subsumed by the ECB? A pull out would have to be a very fast and last minute act (unlike the long run up to the Euro’s inauguration) and the chaos in the country concerned would be extreme. Unfortunately for those suffering in the currency and monetary straitjacket of the Eurobloc the solution is just to grin and bear it.
Gold is holding up in the mid to late 920’s at the moment as the bounce from the massive support at 890 last Tuesday and Wednesday runs out of steam. We are now sitting between some major market moving levels and longer term traders will be eying them with some concern. On the up side there is strong resistance between 940 and 952 and, of course, at 1000 while on the downside the upward trend line (from which we bounced last week) is now at around $900.
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