With yields across the euro zone disappearing faster than a rat up a drainpipe the equity markets are possibly looking glaringly undervalued which probably accounts for the fact that the market has managed to rally even though the growth prospects have dwindled just as fast as bond yields.
My broker desk pointed to the fact that December 2012 3mth Euribor expectations were for around 0.18pc even though current base rate is 0.75% (!) and that even the Dec 2014 rate (more than 2 years hence) is at near to 50bps. This effectively shows two things, firstly growth prospects are virtually zero and secondly that the ECB is likely to keep interest rates below inflation (effectively a negative return) as they attempt to keep the running costs of all the bail-out monies as low as possible.
Today we will see the UK’s net borrowing requirement for Aug and after the grim July number expectations are not exactly high that these will be much better. A Chinese politician at the ‘Summer Davos’ event, just finished, summed up the European/US problem when he said that China was looking for a model that did not go down the extreme social cost route of the West where huge sums are paid out in far too much in various benefit allowances effectively paying people to sit on their backsides and then…. going out and borrowing even vaster sum to pay for it! A model that is sustainable in the short term but certainly not on a long term basis.
Markets
The FTSE bounced neatly off the support mentioned yesterday at 5820/25 and is now snuggling up to the bottom of the resistance band above 5880. As commentated clients are heavy sellers at any price above these levels which is hardly surprising as markets have continually failed to make progress at this point. It seems that the only thing that manages to punch through resistance levels is Central Bank action of one kind or another and with little in the way of news expected out of an of them in the near term this is adding to our clients feeling that selling here is reasonably ‘safe’. Obviously too much confidence in trading ranges could be deadly as a break out would prove very costly indeed but today looks to be very boring indeed.
Although we do have option expiry at 10.15/10.30 which might add a bit of spice.
The US markets have managed to get above post crisis highs (unlike the FTSE) and the S&P can now see the 2007 peaks as a less distant goal. Technically there is not actually much in the way of volume or price resistance to the upside at these levels and bulls are looking for 1525 as the next big target. If we can manage a close this week above around 1457/1460 then some may claim that this is a confirmation of the move.
In currency markets the Dollar has resumed its weak trend but in truth the majors are still pretty much I the ranges that have dominated for years. The Euro is having problems holding above 1.3100 but is also find support below 1.2950, our clients are following the trend though and are buying weakness.
Oil having dropped about over ten dollars in a few sessions is finding support below 108 (Nov Brent) and clients have also been buying into the recent weakness. For all the talk of Arab Spring/Unreast/Iran nuclear ambitions/Growth/stagnation etc the price of the black stuff has basically oscillated around 110 for nearly 21 months now. (although oscillated might seem an odd word when the low is 90 and the high nearly 130). As we are now at 110.28 it is almost ‘toss a coin‘ time. But it is fair to say that past price falls have tended to be a bit more extreme than just 10 bucks with 15 being more usual.
Gold remains solidly at the recent highs with any selling being quickly reversed. We are now at 1774 and 1750/55 seeming to be too hard a nut for the time being to get through on the down side and 1780/85 on the up.
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