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Market Comment 17th Aug 2012

Finland has, once again, pointed out that there actually is still an elephant in the room. 

The finance minister has stated in what used to be called ‘frank terms’ that his government does not trust the big four not to stitch up the smaller members. This is explosive stuff and one must hope that it is just posturing for his domestic audience.

Italian debt levels continue to worsen and, even if you completely leave aside any ongoing deficit, with current GDP debt at over 100pc, average yield currve rates still close to 5pc and zero growth it is hard to see how this is going to be reversed any time soon. Just sticking a finger in the air indicates that GBP/Debt ratios will increase by the average interest/expiry rate. Of course much of their current debt is at much lower rates than the prevailing market levels but eventually new issuance will drag the averages higher.

Debt is increasing by around 10 billion Euros a month… month after month after month. If we equate this to the free float on the Facebook IPO this is the same as an equivalent sized issuance every month. The total deficit chart is, frankly, scary.

Whilst nothing much appears to be happening in the way of solutions the problem is silently getting worse. Eventually one of an increasing myriad of nasty scenarios will happen all the way from multiple euro exits to a euro fortress which will lock in endemic structural weaknesses on an altar of zero growth.

There are a couple of semi-important economic releases from the US this afternoon of leading indicators and Univ or Michigan confidence levels. It is difficult to know whether these will tell us anything new but traders should beware a sudden price shift at 1500 (London time).

As I have mentioned Facebook, I feel that some comment should also be made of the odd market activity yesterday. The shares opened 5% lower on the fact that the first lock in period had expired and so there were more potential sellers of the stock.  The odd thing about this was that it was hardly a surprise.  It has been almost headline news in the financial press for weeks. Investors in the stock must hope that this is as low as it gets but with much larger Lock In volumes due to expire over the next few months I can imagine that holders are not exactly comfortable.

Indices markets continue to probe the highs with the S&P and Dow within touching distance of the April/May peaks. Our clients continue to believe in the trading ranges and are heavily selling all the majors. I have just walked back from the dealing desk and I cannot remember ever having such a big client short on our books. To be fair until a break out actually happens it is reasonable to believe that history will repeat itself but I am mindful of the saying that “the markets will generally move in the direction that causes the greatest amount of pain to the greatest number of people”.

Resistance in the FTSE remains above current levels at around 5875/85 and 5910/20 and support still around 5815/25 and 5785/95. Whilst the S&P having broken the heavy levels at 1406/08 is now looking at 1416/17 and 1426/28 with the previous resistance (1406) now turning into support. The Dow has a bit more room on the upside to 13310/20 and 13335/45.

With summer drawing to a close markets may well begin to focus on eurozone problems again. The downward trend line in the EUR/USD which we have been mentioned a few times recently (and which has held rather prettily on a couple of occasions) now looks in danger of being broken simply by the market staggering sideways through it. Trading ranges are contracting and volatility falling off a cliff so it is tempting to consider that we might just see 1.2350 becoming a pivot point around which market s will coalesce until the sovereign debt issue raises its head again.

Gold has bounced from its fall out of another failure at 1630 and buyers will be hoping that we are building for yet another attempt at the level. Bears will conversely be looking to sell at anything north of 1625 in the hope of a repeat of the last four failures. The price is currently at 1617 up from 1605 yesterday morning. There is resistance at 1619/20 before the major barrier from 1626-1630 on the support side we have light levels at 1612/13 and 1607/8.
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Market Comment 17th Aug 2012

Finland has, once again, pointed out that there actually is still an elephant in the room. 

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