Markets look to be on the up this morning after a weekend of no ‘overtly’ bad news. Such is the feeling of desperation amongst investors that anything even negatively positive is grasped like flotsam in the shipwreck of so many portfolios.
The FTSE is called some 80 points higher in pre-market action at around 4145 and traders will be hoping that this time we can hold on to the rally. In the longer term valuations (as mentioned last week) look good but many a trader has been wiped out by incautious dabbling or too aggressively trying to call a change in direction.
The fact remains that real pain on the high street and in employment prospects has yet to filter through. Retail sales overall are actually still up on the year and debt levels in the UK are rising as individuals push purchase costs further into the future and it cannot be long before Banks start to cut back on leeway over Credit Card usage. It is this prospect (amongst others) which is concentrating the minds of investors in Retail and discretionary spending stocks. Many retailers work on very thin margins indeed (even the supermarkets) and it would not take a large sea-change in spending habits to see an even more serious impact on the bottom line. The UK is so dependant on the service sector (in all its guises) that we sometimes fail to remember where the money actually comes from. Whilst work in itself can be considered to be of value, underlying everything must be the creation of a product otherwise all we are doing is funding today’s spending with yesterday’s savings and tomorrow’s growth.
Gordon Brown's insistence that banks get back to lending to small businesses and house buyers rather ignores the fact that the FSA has now put an 8 to 9pc Tier 1 capital requirement on financial institutions. Coupled with the regulators now climbing all over off balance sheet Mortgage/Credit Backed Securitisation (with a mind to restricting it) and you very soon run into the fact that Banks will just not have the room on their balance sheets to lend….even with the huge capital injections from the State. It might make for good headlines “regulators rein in banks”.. ”PM tells banks to start lending” but I am afraid that the effects of the last year means that we are likely to have tight money for quite some time.
Markets appear to be moving in opposite to recent market directions. Recently strong equity markets have meant weak gold prices but this morning we have a big 20 buck rally in the Yellow Metal pushing us back above the $800 mark coupled with a surge in the indices showing the Dow up 230 the S&P up almost 30 and the FTSE, as mentioned, careering around in post and pre-market action. Oddly enough in very early action late last night (Sunday) the Dow was being called 150 lower! But the Far East seems to have decided that enough is enough for the time being with the Nikkei closing some 300 points to the good and the Hang Seng soaring 5.9pc (856 points) to close at 15,411. To be brutal though it is difficult to talk in anything other than bear market rallies at this time and I would still recommend sitting on the sidelines with just the tiniest of punts if you really, really must do something. The temptation to ‘make a trade’ can be overwhelming but the sign of a good dealer is one who can sit on impulse and only leap in when the water is lovely.
With inflation looking to reverse (according to the economists) the outlook for interest rates might seem slightly rosier. This would make companies with good margins but high borrowing levels look better value than over the summer unfortunately this is not as easy as it sounds as the companies must also be able to secure the bank funding going forward in an era of tightening credit lines. This will make stock picking even harder that in times past but the rewards of getting something right in the current environment will be magnified.
Currency markets are having a Euro and Sterling day with the Dollar and Yen in retreat for the moment but the 1.75 level for Cable looks to be a bit heavy to break through just yet and then above there we have the 1.7590 to 1.7620 resistance range. In support though there is a solid volume barrier below 1.7360 all the way to 1.7170 so there is a good chance today of range bound trading conditions.
Oil is also bouncing from last weeks lows and suddenly everyone is calling for further weakness having mainly called for 150 and 200 dollars just a few months ago. Many nations have built spending plans on the price of oil staying above $80 at least (hopefully $100) and so there may be some talk of restricting supply to force up the price. Unfortunately for the Oil producing nations none of them really trust any of the others (I wonder why?) so the talk of consensus will always go hand in hand with suspicion that one or more of them is exporting out the ‘back door’. Therefore gaining the higher prices without suffering the lower output income. I have to say that on an output level 60 to 80 bucks would appear to be the stable level but this is vulnerable to wild swings as momentum and fear drives prices to extremes.
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