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Market Comment 13th Aug 2012

As every other comment will probably mention it, I feel I have to start by saying “now that the Olympics are over” markets may now get back to ‘normal’ (whatever that is).

Whilst the UK has been in a sort of happy clappy frame of mind there is no getting away from the fact that the economic environment is getting no better and is, possibly, about to get a lot worse. Mervyn King has indicated that he expects zero growth for the remainder of the year and this leaves any company struggling with a debt situation in a bit of a hole to say nothing of the prospects for this year’s education output.

Oddly enough the equity markets seem completely sanguine about the situation with the UK and US indices at the top end of the range for this year and the DAX (in the midst of a massive Euro Crisis) actually up some 20% since the end of 2011. Re we in cloud cuckoo land or is this sensible? For all of the doom laden scenarios from some of the more excitable commentators there is a strong reason to consider equities above other forms of investment. The essential point about today’s global markets, in relation to asset allocation, is the potential mobility of Corporate earnings, Head Offices and the legal responsibility of Board Members.  As opposed to those involving Sovereign Nations.  If “XYZ Government” decides to solve its deficits by taxing companies more the wizard accountants will arrange matters so that profits miraculously disappear from XYZ and appear in (for instance) Dublin. The company can move its listing from one jurisdiction to another and in extremis even shift its production.  Company Board Members must make rational and proper decisions or risk imprisonment. 

The problem for holders of sovereign debt is that none of these options is available/applicable.  So we are entering a scenario where the likelihood of Sovereign default/haircuts/payment holidays etc, for even AAA rated countries, must rate significantly high versus the probability of Rio Tinto (for example) going to the wall.

While we can expect a certain contraction in overall dividend payments the returns available versus the risk being run for long term investors would appear to currently favour the equity markets.

This said, there is always the chance of a further loss of confidence which will drag us down, but this year we have seen evidence that our clients who have been holding equities have seen every dip over the past couple of months as a buying opportunity rather than a panic and exit scenario.

Markets today are about as exciting as the Olympic coverage was restrained. The FTSE is stuck it the mid 5800’s and truth be told does not look to have any appetite above 5860 or below 5790. Since getting above 5800 a week ago the effective trading range has been around 60 points which gives some indication as to why the VIX (Volatility) Index has fallen to 14% from over 20% just a few months ago and looks likely to dump a few more points today.

The US markets are almost back to the levels of Jun which were, themselves, the highest since Mid 2008. Dealers will, consequently, probably not be too concerned about any pull back in markets as the underswell of buyers seems solid for the moment.  Major Resistance in the S&P is pretty easy to spot at around 1406 and so we will probably get some profit taking or short position creation around here if we get up to the level.  These traders will be cautious though to ensure quick reversals if the index breaks higher and maintains the break.

Currency markets are as interesting as the indices with the Euro stuck in a battle between those who believe in the project and those who don’t. the medium term falling trend line is at around 1.2380 which might attract some interest but unless we get another ‘spook’ in sovereign debt problems it would appear that markets are sanguine as to the immediate solutions/issues.

As mentioned ad nauseam the pound seems stuck versus the dollar oscillating around 1.5700 (or so) with occasional attempts at the low 1.60’s and equally sporadic efforts at 1.5250. With the current price bang on 1.5700 the temptation is to say ‘toss a coin’.  We have reasonable resistance at 1.5715/20 and then heavier at 1.5770/80. On the downside support is evident at 1.5625/35 but there is a short term support trend currently  at around 1.5525/35 which might bear watching.

For Gold the story is still the same but possibly getting interesting in the near future. We have been constraigned by 1630/35 since mid May with every rally failing at this level (sometimes quite spectacularly) with the market now grinding its way higher and currently at 1624 we may see yet another attempt in the near term.  Dealers will be watching closely for a break higher as this might be trend reversal opening the way back up to the 1700 levels. Unfortunately eyes will be just as peeled on a reversal as the last four attempts have all resulted in swift 50 to 90 dollar pull backs.
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Market Comment 13th Aug 2012

As every other comment will probably mention it, I feel I have to start by saying “now that the Olympics are over” markets may now get back to ‘normal’ (whatever that is).

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