Market Comment 27th April 2009

“Markets open heavily lower on the Swine Flu fears and airline shares take a pounding.”

Ditto a few years ago on the Bird Flu epidemic and a few years before that on Asian Flu.

There seems to be an inbuilt tendency for people to believe that ‘at some point’ a huge worldwide pandemic will sweep the globe decimating populations and bringing down civilization. The fears are generally swelled by whichever section of the medical science requires a bit of funding at that moment and will be bolstered by any health service spokesperson who is worried about budget cuts in the current economic crisis.

That having been said the effect on already damaged world economic growth may be incalculable. Mexico City has been effectively under a voluntary curfew and if this state of affairs were to spread would cause a significant slow down in consumer spending. This would almost certainly tip already weak businesses over the edge.

Fortunately (for those who actually contract the Flu) existing anti-viral drugs seem to be effective but this will not help if a general panic over avoiding public places builds to a concerted level of inertia.

Markets are well off from the highs of Friday night where the FTSE closed at 4155 still just under the 4160-4175 major resistance/support level built up over the last seven months. We are still above the 1 year down trend line which was breached on Friday at around 4070 but a move back below this point would give investors real fears that the rally since early March was under pressure. Not only this but we are about to enter May and the old saying of ‘Sell
in May and go away’ still has a remarkable number of followers.

Not surprisingly the dollar has had something of a bounce this morning as flight to quality rears its head again but it is tempting to state that as the fear of the Pandemic slowly fades (as it probably will) all of the above statements will reverse. Unfortunately this might take a good few weeks/months, the Bird Flu crisis (which amounted to a tiny handful of cases) had a bad enough effect and this was in a time of strong economic growth. A virus that actually does kill people may have a much deeper economic effect given the weak state of business in the first place.

Oddly enough Gold seems quite restrained given its usual ‘last resort’ status. The metal has only moved a few dollars higher overnight to 913 bucks still well up from the lows of last week but seemingly not affected by the normal ‘fear and greed’ of recent years. It is tempting to suggest that a good hedge against other asset classes would be a ‘buy gold’ scenario.

Clients closed out on Friday evening heavily short of all indices and have been reaping a nice little windfall this morning as the policy of opposing all moves pays off once again. Monday reversals of Friday moves are almost becoming rote these days especially if the Friday move is a low or high. Traders have begun to take light positions over weekends taking this into consideration and these have paid off many more times than not over the last few months.

This week is likely to be dominated by news from Mexico but the current situation in Pakistan should also be of concern. The Government is looking shaky in the face of Taliban insurgency and the US may find it difficult to influence events. The problems over Iran which has been (possibly) searching for Nuclear weapons technology would pale into insignificance if the Taliban actually gained power in the already nuclear armed nation. With economic woes afflicting the poorest nations even more than those like our own the chances of extremism stirring up revolution increases dramatically. It would place even more burden on struggling economies if the wealthy nations had to start increasing defence spending in response to a global surge in tensions.

With politicians in this country seemingly determined to stir up class hatred rather than actually work to solve the economic woes in a desperate attempt to retain power (even if it bankrupts the nation at the same time) a perfect storm of problems may well be in prospect.

Oil is reacting to the news across the Atlantic as reduced personal activity means lower fuel use. As we saw towards the end of 2008 it takes a small shift in inventory levels to cause major moves in price. Oil is one of those commodities where a little too much means very low prices and a little to little makes for very high ones. This is a direct consequence of the extreme lack of development of refining and storage over the past thirty years (nobody wants a refinery or storage capacity anywhere near them). This means that storage is very expensive and drives a ‘just in time’ mentality. Fine when things are going well but problematic in times of surges or dearths in demand. It would not take much for the tankers to be lined up once again in the Gulf of Mexico “waiting for a better price”. The last few days of the June contract may make interesting watching as we get towards the middle of May.

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Simon Denham is COO of London Capital Group and Capital Spreads. We do not endorse the information and analysis available in this comment and it is provided purely for information purposes only and is delivered as a personal view by the writer. Under no circumstances is the information in this comment to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. The investments referred to herein may not be suitable investments for all persons accessing this page. You should carefully consider whether all or any of these are suitable investments for you and if in any doubt consult an independent adviser. We accept no liability whatsoever for any direct or consequential loss arising from use of the information on this web page. Please see our Terms and Conditions.

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