Markets continue to jump around all over the place but the total effect seems to be very little. After the close at 16.30 yesterday the FTSE futures market initially traded almost 100 points lower before turning around and moving 130 higher, only for the open this morning to be called at around the closing level after all.
This type of activity is not exactly conducive to sensible/long term decision taking and traders seem to be getting ever more short term in their activities. We are seeing only around 1 in 10 opening trades remaining on the books at the close of business and whereas there used to be a solid base of long term equity traders (buy and hold) over the past year or so the extremely poor market performance has slowly beaten them into submission.
Anyway, today will be all about the rate decisions coming out of the BOE and the ECB. Both are expected to cut but the arguments are as to how much. For the BOE the panic button seems to have been well and truly smashed and after the ‘historic’ 1.5pc cut last time there are some considering that another 150 basis points might be on the cards. The historic seems to be dragged out every time we consider the BOE’s rate decisions these days, frankly ‘historic’ I feel rather better sums up the central banks actions in the first nine months of the year when they concentrated on inflation to the cost of everything else. The economy would be shot anyway but we might have been able to mitigate some of the damage that we are now likely to suffer if the MPC had actually taken their heads out of their text books and actually looked around at what was happening on the ground.
Mistakes on a much lesser scale would normally be associated with a swift handshake, a P45, and a quiet leaving drink in the Pub round the corner. But as with most things to do with the State sector your virtually have to murder your grandmother before somebody thinks ‘mmmm……… possibly not the chap for the job’. What is the punishment for aiding and abetting the destruction of an entire economy?
So market will be quite moribund until the 12.00 BOE and the 12.45 ECB announcements. It is difficult to believe that the markets will take big rate cuts as bad news which has probably got something to do with the rally of recent times and, in truth, we have finally started to react reasonably to even bad information. Over the period from May to October virtually every piece of economic data was read negatively, whether it was or wasn’t. Not only this but the market reactions often went way over the rational. Recently the data coming out of the various government agencies has continued down the grim, grimmer, grimmest line but the markets have been pummelled so far that their ability to shock has almost been removed.
I was asked a while ago when I thought the bear market would end and my answer was “when people stop taking bad news as a reason to sell”. We might, just might, be approaching that point. Unfortunately ‘the markets’ are not the economy. Unemployment and bankruptcies tend to lag the financial market nadir by up to twelve months and there is still the unsolved question as to whether the banks will be capitalised well enough to lend us into a new growth period. Do not be fooled into thinking banks just operate for their own benefit. The power of the financial sector to lend to corporations and individuals is what the western economies are built on. If this is taken away it makes it very difficult for businesses to grow as they must do so from cash flow rather than borrowing.
The exciting markets to be in at 12.00 will be the currencies. Selling the rumour and buying the fact is a popular city saying and the pound was certainly sold off on Monday after statements from a respected commentator suggesting 150 basis points might be on the cards on the way down to zero in the medium term. This morning the pressure is once more against Sterling with the Cable rate at 1.4671-1.4674. We are down at a very major support level from which we have bounced violently over the past three weeks. The difference this time is that we are sitting on the level just as the MPC makes its move. Sterling/Yen is also at a new low and versus the Euro the best that can be said is that we haven’t broken through the lows just yet. If we are not in a sterling crisis yet we are pretty close. Remember that this is all happening before the government has actually started the huge Gilt issuance of the next five years.
Gold tried to rally yesterday but could not summon the energy in the end and slipped back to the closing levels of Monday. This morning the sellers are out again and we are slipping towards the 765 level. As readers of this comment over the year will know I have never been a believer in the 1000/2000 gold valuations and the recent failure of the last rally to get near to the previous moves highs would seem to confirm that the precious metal is still in a bear trend. Bulls will be hoping that the strong volume support between 715 and 765 can hold the market up. If it does then we may see the formation of a bottom but at the moment the test seems to be to the downside once more.
Oil has hit another new low overnight and Brent is now at 44 dollars. Less than 1/3 the price of earlier in the year. OPEC may regret their decision not to cut back production. I do not believe that the price will get back to the 20-30 range of the nineties but to be honest the scale of the correction so far would indicate further pain to the downside.
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