Markets are opening slightly lower this morning but to be truthful there is not a whole lot of activity going on.
The pull back from the highs of last week can still be considered a pause in a bull recovery and, in the FTSE 100, the inability of the market to penetrate below 4300 indicates that investors are still favouring the upside. On the other hand whilst we all read and write about the possibility of the green shoots turning into a definite growth scenario next year this rather ignores the fact that we still have 7 months of 2009 to get through just yet. The remainder of this year is unlikely to be as friendly on a personal level than the last 18 months and it is how consumption stands up over the next period that will define whether a rebound is on the cards.
It has been a factor of this recession that while the ‘headline’ numbers and news have been truly dire they do not seem to have turned into the scale of personal disaster that defined previous downturns. Yes, people have lost their jobs and a certain number of homes have been repossessed but, overall, consumer spending has remained much more powerful than might have been expected. It seems to me that, for all the statements that this is the worst economic situation since the war, it does not actually feel like it. Does no one remember the period of mass ‘localised’ unemployment of the eighties? Unfortunately it is tempting to ponder on whether anything is this easy. There is a very strong possibility that the current flattening of the downward spiral (leading to some small confidence of an upturn next year) may turn out to be just a pause in a long, long, period of flat to only marginally positive growth.
As mentioned the FTSE is holding above the 4300 level and bulls should remain reasonably confident so long as we do not close below 4290 (or thereabouts). Punters are buying at these levels and building up solid longs so there seems to be a certain amount of confidence that we can hold here and return to attack the upside once again. In the short term we are likely to run through a protracted period of dividend slashing as companies look to pare back borrowing and cling onto cash but this has been well disclosed already and ‘should’ not have much of a negative impact (of course ‘should’ and ‘will’ are two very different words)
The American indices have also paused for breath but unlike the UK markets the bounce back appears to be less pronounced. While the FTSE has broken back above the medium down trend neither the Dow nor the S&P has managed it. The S&P still needs to get close to the 1000 level to break the bear run, a further rally of well over 10pc (nearly 15). This gives something of an indication of how much resistance there remains to the upside.
In the currency markets the dollar is fighting a rearguard action after the weakness of late April and early May. Versus the Euro the greenback found the very same support level as back in March at around 1.3700 and we can see from the last few months trading activity how hard it has proved for the Euro to hold onto any gains above 1.3650. With arguments across the globe about whether nation states will get involved in buying the ever increasing levels of Treasury bonds (and Gilts of course) it would be a brave man who would gamble on too much of a dollar upside over the next few years but currency markets have a habit of defying the obvious. Much of the worlds trade is still denominated in the dollar and foreign states hold enormous quantities of existing treasury issuance. It is not exactly in anyone’s interest for the dollar to go into freefall as this might have rather unfortunate side consequences. For the meantime the greenback I stuck in a trading range of 1.30 to 1.37 vs the euro and 1.50 to 1.5350 vs the pound. Against the pound there would appear to be a greater argument for a rally but sterling sellers have taken a real beating over the last two months so there may be little appetite to try the downside just yet.
Oil remains stronger than of late as OPEC continues to attempt a move towards its stated target of $75. The bounce from the low 40 dollar region has been going on for quite some time now but we really do need some evidence of increased economic activity to get more excited. Black Gold is very expensive to store (heaven knows how much all the tankers moored offshore are costing) and we need evidence of pressure on inventories to really get excited about more price activity to the upside just yet.
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