Markets are like a fairytale this morning… Grimm
The continued slow grind lower is taking its toll as investors are starting to wonder when will it all end.
Seven losing days on the trot is not unique but it is certainly unusual and with the FTSE called some 35 points off on the open (the call was 70 points late last night) the odds are on another poor performance today as well. There are always bear squeezes in markets but the slow drip, drip of lower prices does not seem to indicate heavy short position building just investors finally giving up the ghost.
Our Lords and Masters seem to have finally noticed that hammering banks and bankers every single day in the press is not exactly conducive to increasing business flow. If moral is non-existent, you are pilloried by politicians (of all people) and your little annual bonus has been banned by a populist leaning Prime Minister (I am not talking about the masters of the universe here, just the guys on the front line) would you be minded to approve that new loan to what appears to you to be a failing business? It is all very well for politicians to exhort banks to lend, lend, lend but if injudicious loans turn into even more bad debt they will be the first to jump (yet again) on the incompetent bankers band wagon.
As mentioned European markets are starting on the back foot this morning with the Dax and FTSE called lower once again. The Dax in particular is showing extreme weakness with the index down below the lows of October and November when the 4000 level gave strong support. The index has now blasted through here and is at 3900 to start. The spread between the FTSE and the Dax has narrowed from 450 at the start of the year to the current 80 to 85 points as the banking sector (which has a higher weighting in the German Index) pulls it down. Traders should be wary of ‘buying because it looks cheap’ by all means go long if a bounce looks to be building but in the current sentiment you should be quick to look for the exit if things go wrong.
Both the US indices are now in new territory and looking to break under the 12 year lows from 1997. I am reliably informed that the Dow has now broken the 100 year moving average which is interesting but not exactly helpful concerning the move over the next day or so! The destruction of wealth over the last 18 months is now approaching apocalyptic levels and even the vastly wealthy are nervous about any further investments or bailouts of current liabilities. The Oil nations must be particularly p****d off after the huge inflows of funds with petroleum at 70 to 140 bucks caused massive injections into equity stakes. Many are now struggling with budget deficits and the realisation that much of their money has gone down the plughole.
The news across the business spectrum continues to deteriorate but long term investors should try to disassociate themselves from the current situation and try to look through the near/medium term. There are good returns to be had from many reasonably strong corporates (even down into the Aim markets where some stocks are trading on two times or even lower expected earnings). The hunt remains for stock with low (to capital ratio) loan levels as, for all of the political urgings, there is a good chance that finance liquidity will get even harder to come by through 2009.
Currency markets continue to play cat and mouse but as mentioned a few times in recent weeks the Yen seems to be finally losing its lustre. The massive overvaluation of the currency was causing heavy losses in Japan and with the economy yet again slipping into recession (put another record on) the fact that the carry trade has now completely disappeared is not a good enough reason to buy it versus everything else. The double bottom at 87.00 for the USD/JPY recorded in December and January and the “W” formation being built may well indicate a longer term target back up at 105.
Meanwhile the Euro continues to look a tad weak as it failed yet again to follow the Pound higher. While it is up this morning against the greenback the downside still looks to be the favoured direction although a close above 1.3080 might indicate a reversal of fortunes. With the price currently at 1.2741-1.2743 this is pretty academic at the moment of course. On the downside the obvious target is the lows of the current move at around 1.2500 and below here the long, long term trend support currently at around 1.2420. This major support was attacked back in October 08 and the failure to breach is was the signal for the bounce back up to 1.47 in November and December.
Gold failed to live up to its contra indicator role yesterday as the falls in the indices did not create another surge in prices. We may just be in a pause for breathe before another push higher but the air is getting a tad thin up here and another failure at the 1000 level might be third time unlucky.
Oil failed to challenge the $43.00 level mentioned in yesterdays column and the reaction sell off was painful for bulls. On the downside we need to break below 40.35 to confirm a new bear phase but clients seem happier buying at the moment anyway. The long term momentum remains to the downside as the ripples of the huge fall from 145 bucks continue to wear down bulls.
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