Markets looking warm again this morning after the small sell off yesterday afternoon failed to find any follow through. The FTSE futures neatly closed the gap opened up at 3960 on last Wednesday’s close versus last Thursday’s opening mentioned in yesterday’s comment. Punters had a good time of it yesterday holding on to index shorts in the US and UK markets until the evening and then reversing into longs for the late rally.
Today sees a bit of comfort drifting back for the bulls with the FTSE up around 25 points but the Dow remains just below the psychological 8000 level and investors will be worrying that the recent failure to hold above this mark might weigh on traders sentiment. The current price of 7950 is still well up from the lows but there is the continuing fear that the G20 glamour may well turn out to be just so much fairy dust. Sentiment is a fickle thing and a move below 7730 today or 7790 tomorrow may well bring out the sellers once again.
In truth most markets are continuing to trade in the ranges set up over the last four or five months with few attempts to follow through on any break outs. Most of the currency crosses (aside from Yen) seem to have been about to break out on many occasions only to fall at the final hurdle, the Indices trade the same ground day after day and even the major commodities struggle to find impetus to clear away from constricting supports and resistances. While this situation continues trade volumes will probably remain muted and exchanges will struggle to maintain heavy liquidity flow.
Overriding much of the recent rally in the equity markets has been the refusal of the credit markets to follow suit. Credit Spreads remain stubbornly high and either they are about to have a sudden correction lower or the equity markets might be forced down to reflect comparisons of risk. If the credit markets are valuing the risk of default in corporate debt at a much higher level than the value of the equity is assuming then something is out of kilter.
It is would be nice to see some kind of continuation in the Sterling rally but the dollar is defending the approaches towards 1.5000 quite strongly once again yesterday with the rally petering out at 1.4960 followed by a sharp sell off down to the 1.4650 region. This morning buyers are holding the cross up at 1.4730-1.4733 but failure to make headway soon will, I fear, quickly turn to a retracement back to the 1.43-1.44 region. The steep downward trend of late 2008 has definitely been broken but this does not yet mean an instant return to the upside. Cable traded in a very tight range from January to August last year with just 10 cents or so covering the entire spread for the period before the huge move lower. While we have gotten used to big currency swings over the last few years especially in the Yen and Euro it must be recognised that the intraday violence of recent months is definitely not normal. Currency markets usually have big trend moves taking months/years to begin and end but without many of the massive dislocations that we have become accustomed to.
As mentioned several times in recent comment the Euro starting to look a tad tired and yesterday’s failure to make headway above 1.3600 was punished severely in afternoon action. This morning is seeing a continuation of the fall versus the dollar and we are now at 1.3360. 1.3310 to 1.3330 is quite a good support level and both bulls and bears will be anxious to see whether traders will have a pop at it later today. A breach and close below 1.3300 would possibly open us up to a move back into towards the 1.2500 major support which has held so solidly so far this year.
Gold is finding some buying this morning as well with investors finding value below the 890 level. Since breaking the 890 support we have not found a huge liquidation of longs coming through and aside from one sharp sell off at around 14.30 yesterday trading has been surprisingly muted. We are now seeing action between 870 and 880 but this is very much sideways and not particularly informative. Support now seems to be at 865 and resistance (obviously) at 890 and to be honest there is probably not much point in getting involved until either of these levels are approached or broken.
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