Market Comment 29th June 2009

The congested trading ranges continue to dominate proceedings with the Markets loath to make a decision about direction.

Punters who are patient and not too aggressive have been able to pick the trades quite simply in virtually all the major arenas especially in such favourites as Cable, FTSE, Oil and the Dow. The ranges have almost become set in stone for all of these markets and the only problem is to avoid being the wrong way round when the break out finally arrives.

On this issue the inability of the FTSE to recover from the 4200 level is becoming a concern as other indices do seem to have bounced from the lows of last midweek. Clients continue to buy the weakness as this has proved to be the correct decision for some considerable time but it must be noted that this continued failure to move away from the support at 4200 is worrying. While the major economic forums are uncharacteristically optimistic at the moment for future growth (2010/2011) this still seems to be more of a line in hope rather than expectation. The huge levels of debt created in the consumer portion of the global economy are not going to disappear overnight and this commentator fears that we will have one two hiccups on the way.

Buyers have been much in evidence in the first few minutes of action this morning as the FTSE, which was called down at around 4225 in pre-market activity, was swiftly bought up to the 4250 mark. Short term there is a small resistance level at 4255 which might prove awkward to break through but, for today, the sun is shining and there appears to be little reason for any dramatic activity.

There is a whole swathe of minor economic data from the Treasury this morning which might attract a bit of interest (mortgage lending and approvals, consumer credit, M4 lending) but the macro economic position of the UK remains grim no matter how we buff up the data. Unemployment levels are becoming an “Elephant in the room” subject as economists forever talk of Job losses as being yesterday’s number. The problem with glossing over the employment numbers is that job creation over the last half a century has been dependent (after a recession) on robust lending. The banks are not in a position to dole out the largesse this time around and we risk an endemic pool of unemployed for the foreseeable future. With some 800K school and university leavers over the next few months 3 million looks to be the starting point for the second half of the year rather than the end point as was hoped only a few months ago. We now have the highest number of people officially out of work for 12 years and this does not include the huge numbers now on incapacity or “job creation schemes” or other redefinitions of recent times or the vastly increased university pool.
With more and more people now worried for their futures the savings rate (already at a 15 year high in the States) is likely to increase putting further pressure on the UK’s service sector economy. The UK’s mantra of ‘spend today for tomorrow may never come’ seems to be finally losing its grip.

Cable this morning seems to be moving towards the highs of its range after looking briefly for a move lower in early action. 1.6550 is still a good resistance level although we did spend a few hours last Wednesday probing the 50 pips above here. The current price is 1.6540-1.6543 (having hit 1.6430 earlier) and we are seeing sellers sharpen their knives once again. The 1.6200 to 1.6550 range is becoming a little boring now so we might hope for some attempt at a break out but I would hardly hold my breathe. The weight of money opposing every move is becoming increasingly successful as (so far) there has been no significant trial of weak longs or shorts. A move above 1.6600 may be interesting but for bulls it is probably not worth getting involved until this resistance has gone (or the market goes back below 1.6300 again. The bears seem confident that this morning’s move will fail again as we are seeing heavy selling as we approach 1.6550.

The moves so far this morning are almost solely sterling based with the Dollar, Yen and Euro all quite moribund. There seems to be a sense of trying to find the weakest currency rather than looking for the ‘strongest’ as the news from across the globe continues to be poor (for all of the ‘talking up’ from the OECD) and the Swiss Central bank intervened last week selling the Franc at the 1.0650 level. The Franc is (like gold) a safe haven instrument and the return to the highs for the currency would indicate that a lot of money is unhappy with current conditions. The immediate move of almost 350 pips on the news of the selling showed that the SCB still has significant power but we are well off those immediate highs (at 1.1015) and the general drift into the Franc seems to be still in place.

Lloyds has become a conviction buy for Goldman Sachs this morning which has had an immediate positive effect but the selling pressure on the open, up at 70p, was almost instant. Reflecting, one supposes, the waning impact of GS on investors opinion. The bank has the biggest share of the domestic economy of any single bank in the G7 and GS reckon that this will pay dividends in the future. It may well do so but investor fear remains in place over the near 45pc holding of the State and the fact that a huge stake in the domestic economy is wonderful so long as you are around to enjoy it! If the domestic economy turns south again Lloyds’ pre-eminent position will be a millstone rather than boon.

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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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