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Market Comment 20th Sep 2012

The Central Banks rewriting of every piece of economic common sense continues unabated. 

Easing, by whatever name we call it is just “printing money”, is now a standard reaction in the majority of the developed trading blocs across the planet. Each country is by turns announcing more and more issuance. Even Japan whose experience as a serial issuer must surely, by now, have told them it does not work has re-entered the game.

In the virtual total absence of any hard decision taking by the world’s politicians the central banks are left with pretty much no option but to continually prop up debtor nations. Poor old Ireland who were lauded for their responsible attitude, savage cost cutting, actual salary reductions etc etc must now be wondering why they bothered.

Economically unrealistic cheap money has been tried and failed so many times in history (in recent times we have several obvious examples in …..eerrr…. Spain, Portugal, Italy, Greece, Ireland etc) that one does wonder why people think that this time will be any different. If every single country just turns on the presses then even my ‘O’ level economics brain is able to work out that we just end up in exactly the same position but with everything slightly more expensive and with an even bigger pile of debt. Good (technically) for asset prices if you have borrowed at virtually zero to buy them but otherwise not particularly helpful.

Effectively a game of pushing the ball just another few paces down the road.

The problem with the statements above is that nobody dares do any different for fear of possibly creating something worse. Unfortunately, with most economies bumping along on baseline growth after four years of stimulus we are pretty much hoisted on our own petard. Many commentators (myself included) believed that the bad tasting medicine should have been taken in the first place rather than the continued temptation of tasty sweets that has been the only diet since the financial crisis. Sadly, virtually every western economy is now so hooked on the sugar rush that the thought of going ‘cold turkey’ has become so unpalatable that it is almost impossible.

The Japanese ‘lost’ years beckon for the West.

The Markets

With the world wide Central Banks continual support volatility in the markets has continued to drift lower. While we experienced a bit of a sugar rush on various stimulus announcements over the last few weeks/months the actual daily ranges outside of these are pretty pathetic.

Indices are falling from recent highs in early morning action as corporate results continue to disappoint coupled with Chinese manufacturing output continuing to contract (for the 11th month) and Japanese exports recording a near 6pc fall YOY. Sad to say if even China is not showing signs of stronger growth then the outlook for the more mature markets cannot be seen as anything other than grim.

For outright Index values we have the obvious quandary where economic reality is running headlong into falling value of actual money (as more and more of it gets printed).

The FTSE is opening some 40 points lower and our clients are counting the cash having sold very heavily into the failure to make gains from last Friday. Traders now have very short time horizons and we can expect very quick profit taking if the early weakness does not (very quickly) turn into a more general retreat. For the FTSE there is good support at 5820/25 and 5805/15 and the trend over the past four months or so has been for solid rallies over short periods of time, followed by stagnation, followed by smaller retracements then leading to the next rally (generally prompted by another stimulus package). Clients have come to recognize the signs.

On the resistance side it is easy to see that pretty much anything above 5880/5920 is running into selling with the Feb/April highs being the most salutary evidence.

Currency markets meander around to the latest fear with the US ‘fiscal cliff’ having dominated thinking for the last month or so. In reality we know that the Senate/Congress/President will cobble together some emergency package, as they have done over the last four/five (I have lost count) similar instances. Republicans will not risk the military budget and democrats the social one. The Eruo having bounced over 10 cents from the lows in July is now taking a breather having retraced back into the early 2012 trading range.

Gold is the one major winner out of all of this with the ‘relative’ paucity of actual stock coupled (aside from mining) with the distressing inability for politicians/banks to actually create more of it out of thin air. Dealers continue to buy into any dips and so far their faith has been repaid over the last eight or nine years with only the peak of last August dampening optimism. In recent days the 1750’s have proved difficult to get through on the down side with 1738/42 also being a good support. On the top end 1778/82 and then the peak of last Feb at 1788/90 are both proving tough to break. Although it is fair to say that the next Fed/ECB/BOE/BOJ (etc) loosening could possibly be a trigger.

All in all the early weakness is looking to have petered out and our clients are already buying into the move.

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Market Comment 20th Sep 2012

The Central Banks rewriting of every piece of economic common sense continues unabated. 

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