Markets looked sour yesterday but for all the huffing and puffing the FTSE yet again failed to break out of the strangle hold of (roughly) 4300-4500.
This morning sees the cash market called lower at 4310 but this is well above the closing level in out of hours trading last night of 4285. The US and Far East were weak but not weak enough to force such a major test.
Tesco and Sainsbury have both come in with good numbers of above 7pc for revenue increases. While this is a very good indication of the strength of the Supermarkets it is rather unnerving for the rest of the high street. Overall UK Sales are only marginally up and when the major players are showing such strong growth, in a recession, it has to be at the expense of the smaller players. Anecdotally I am seeing more empty units in town centre with many having now been boarded up for quite some time. The dichotomy of the excessive rents and rates cutting margins for units in ‘prime’ locations when their more powerful competition in out of town sites is charged considerably less seems lost on local councils and the fear must be that (as with pubs) the future is in the big retail chains.
Our clients have taken the fall to the 4300 level as another buying opportunity and they are now sitting on some hefty positions. Not just in the indices but also in the individual stocks. Client positions in equities are now 11 to 1 longs vs shorts which is well above the normal 5 or 6 to 1. Only once before have we seen such a large disparity between longs and shorts and that was back in the summer of 2007 when, at the market peak, the level reached over 15. While it is very tempting to state that the support levels will hold and the markets will bounce back up again I am always mindful of my favourite saying about the markets. “The price will always move in the direction which causes the greatest amount of pain to the greatest number of people”. A rather miserable dictum but one which encapsulates the idea that it is not the weight of money in one direction which determines a price trend it is the ‘flow’ of money. If everyone who wants to be long .. is long …then who is left to buy the market higher?
Traders will be eyeing the 4280 to 4300 level like hawks as any successful break through this support area could be very bad news indeed.
Oil made a bid for higher prices yesterday as fears over Iran raised their head but in reality while there may be some local disturbance in Tehran as the two sides battle it out neither candidate (nor their supporters) is going to be so foolish as to damage the one revenue source of the country. Brent crude is sitting above 70 bucks quite comfortably but does not seem interested in prices much above 72 bucks just for the moment. It would be a brave call to suggest that prices may fall from here as the trend is definitely in the bull camp but neither is there a compelling argument for prices much above $75 (the target mentioned many times in this comment as being the ultimate aim of OPEC). As I write the price is pushing above 71 bucks but resistance at 71.25 may hold for a while.
On the currency exchanges the pound managed to rally on the back of worse than expected inflation numbers giving traders hopes for earlier rate hikes than expected. It must be hoped that this does not actually become a reality as this time next year is already being marked as a grim time with public spending cuts coupled with tax hikes. The last thing the economy will need is rate hikes as well.
Cable is pretty flat this morning at 1.6410 having already had a go at both the up and down side in the night and early morning session. Of all the major markets GBP/USD currently seems to have the most interesting trading characteristics with high/lows per day of some 200 points and often more. In the last three weeks the currency pair has traded a full 800 point trading range three times. The overall trend has been upwards since mid March but seems to have hit a bit of a buffer (above 1.66) which may prove difficult in the short term to bust through. There is minor support at 1.6315, 1.62 and 1.6060 but the big trend line support is well down at around 1.55. With news oscillating between bad and minor good over in the US and over here it is not a difficult argument to back to suggest that the current violent but ultimately directionless activity will continue.
Barclays has managed to annoy their investors once again by revealing that full Board employees had options on companies notionally fully owned by Barclays. While the legal position is probably very clear it will rankle (once again) that the top management seem to be rewarding them selves very handsomely while the poor old shareholders take all the risks. The reasons for selling the unit are pretty clear…due to errors in the past the bank needs to bolster its balance sheet…it whiffs, just a tad, that the architects of those mistakes are now benefitting from its ramifications.
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