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Market Comment 18th June 2012

So the Greeks went for the hair shirt rather than risk the unknown of the ‘wasteland’ outside the Eurozone.  

For all of the horror stories of Greece’s potential in a non-euro arena it must be pointed out that quite a few countries across the globe manage to exist without it !

Our clients are initially wondering if the overnight move is going to repeat the events of last Monday when the Spanish ‘wonder bailout’ euphoria lasted all of two hours. The early indications are not good as the FTSE was called up at 5695 at 2300 last night but is now trading over 100 points lower at 5485/86. The Dax has performed similarly with the market now 130 points from the highs of the ‘Dead Greek Bounce’. 

Unfortunately, underlying all of this is the unpalatable fact that Greece is just an extreme instance of a general European problem. The developed world just has too many liabilities and too little income to pay for them.  Germany (virtually the only major solvent economy in the West) must be wondering what it has tied itself to. The simple fact is that Europe (and the UK for that matter) has calls on its purse built up over the last 30 – 40 years that cannot possibly be afforded. We all know this but attempt to tinker around the edges to somehow make the numbers work for one more turn of the wheel. Unfortunately with aging populations, a more dynamic and younger competitor out of the developing world, a reliance on imported energy needs, a huge weight of social benefits and the dead hand of regulation (amongst many other factors) all holding back investment there is just no easy route out of the problems.  And the one thing that democracies are bad at is taking hard decisions.

Whilst the Germans have proved themselves in the longer term to be the best Europeans there must be some limit as to how much they will sell their own future to support the present of other people.

With Governments looking for extra sources of revenue the corporate cash pile must be looking very attractive just around now. There is something of a limit as to how much head office relocation can reduce your local liabilities and so the Irish 12% corporation tax centre is unlikely to prove a haven for too many corporates. The left leaning Greek opposition indicated that company tax levels were a target, I fear that this is not going to be an isolated attempt. The fact is that most tax payers do not own stock and so so not really care where the markets go. Taxing the major conglomerates for revenue made within their borders (and disallowing any offsetting ‘investment’) must be high on the list of targets. Analysts and investors are well aware of this possibility which could well act as a dead weight in the medium term.

Markets

Markets today are still actually UP even after the early sell off with the DAX at 6264/65 putting on 30 points.  Indicating how much higher we were looking last night. There are some pretty solid resistance levels above us at this point at 6345/55 and 6435/45 coupled with the fact that we are unlikely to see much in the way of economic well being in the near term. Support is at 6220/30 and below here is the volume area of the last few weeks all the way down to 6070/80. Below here traders will be fearful of a return to the recent lows near to 5900.

The FTSE (since I started writing this article) has slipped into negative territory for the day and is looking pretty sick to be truthful. It is down on short term support at the 5460/65 level but the sentiment does not seem conducive to a rally just now. As mentioned in previous comments the current level is just about mid point for the last two and a half years and the 5500 region is generally seen as a short term point on the way to somewhere else. If we can actually manage to get above 5500 and hold it then the technicals may begin to turn positive. Unfortunately we have been ‘just visiting’ every time the market pops up over this mark.

The currencies have matched the indices pip for pip with the Euro rallying 100 points early on only to give it all back this morning. I tend to find myself in a very small camp over this. In the long run I think that the Euro would rally if the Greeks had been kicked out. Not the other way round. Keeping them in weakens everyone else this can be seen from the truism that a structure is only as strong as its weakest point. With Geek default and bailout other nations will know that they will always have a lender of last resort and so will shy away from the really critical reforms. For all of Germany’s power it is only one nation amongst many and ‘the many’ will eventually drag down ‘the one’.

The Euro is now at 1.2625/26 and is on a solid support level as I write at 1.2610/20. Below here is 1.2580/90 and far down 1.2435/45. On the upside we can see 1.2670/75 and 1.2745/55. Today though may well be a case of damage limitation and ‘sitting on hands’ as traders try to get a handle on sentiment and support.

The pound had a great Friday as funds flowed away from the Euro prior to the Weekend. We are back up to 1.5660 at the moment a level not seen since late May, having visited 1.5270 in the meantime. As mentioned previously Cable has oscillated around (approximately) 1.57 for the last three years and there seems no real reason for us to believe that this will change. The economic problems for the UK are the same problems for the world (and the US) and so the attraction of one currency over another is hard to evaluate. Yes we can point to various items (inflation/deficits/growth/tax/interest rates etc) but the major currencies all seem to have their fair share. Technically we can see resistance at 1.5690/00 and 1.5745/55 and support at 1.5640/50 and then down at 1.5600 but currently it does not look as though we are trying to pressure either end.

Gold is weak as the end of the world failed to happen and so the short term reasons for being long have evaporated. As mentioned before traders must be wary that for the last few months the falls have been rather more violent than the rallies and so caution in the event of a sharp sell off should be the watchword. As forecast on Friday there was a nice bit of activity between 1300 and 1400 as the US traders looked to position themselves and we might get a similar reaction today as they move to reverse these positions. In the wee small hours a big stop order was triggered (2345 London time) as someone who had presumably bought protection on Friday was closed out taking the price down to 1606 followed by the inevitable rally all the way back up to 1629 (where we started from). Now we are at 1622 looking at the resistance of 1626/28. The market is struggling to close above 1626 and so attention should be paid to this level if we look like achieving an overnight settlement north of it. Above here is major resistance at 1638/40. On the downside there is little near term aside from the natural support at the 1600 level. Minor support is also at 1582/84. But long term the support below 1545 (and especially at 1528/30) is looking very hard to beat.
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Market Comment 18th June 2012

So the Greeks went for the hair shirt rather than risk the unknown of the ‘wasteland’ outside the Eurozone.  

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