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Market Comment 22nd Aug 2012

The UK borrowing numbers pretty much confirmed what everyone suspected. 

Whilst the rest of the economy struggles/cuts costs/ makes sacrifices the public sector continues along as though nothing is happening at all (as indeed, for them, it isn’t).

As with politicians of all hues nasty things are always for implementation at some point in the future (Cuts, Tax hikes etc etc) in the hope that by the time they actually start all the anger will have been spent. No doubt tax revenue from the top 5% who pay 70% of the total income tax take have started to baulk at having the bucket taken to their particular well once too many times. It has taken time for the clever accountants to come up with their plans but you can bet your bottom dollar that the HM Tax Inspectors are struggling to get their hands on the dosh. Coupled with the fact that companies are just not making the profits they used to, the mad 20% VAT rate (which is just a red rag to a bull to even the most law abiding citizen) and we end up with lower Income Tax, Corporation Tax and VAT receipts when the Governments ‘austerity’ is anything but.

When a company goes through cost cutting exercises it actually reduces expenditure. We a government does the same thing it just reduces the rate of increase(!) in the hope that GDP growth will make up the slack. Well, with zilch in the way of positive GDP we can all see the effect on the deficit.

The UK may not be a million miles away from those nice men at Moody’s and S&P taking a sharpened pencil to our prized AAA rating.

Some of the big US corporates have recently been saying the world is getting tougher. Caterpillar (who are one of the big bellwether stocks) recently commented on weak demand and Dell yesterday came in well off on expectations. With the weeks ahead being big on corporate announcements the worry now is that the intitial signals might be mirrored across the board.

The FTSE rejected the resistance levels at 5875/85 with a vengeance, helped it must be said by the aforementioned deficit announcement. We are now close to the first support level at 5785/90 and we can expect dealers to start to cover profits on the big shorts that we mentioned yesterday. Traders profit horizons seem to e getting shorter and shorter at the moment and any profit is being snapped up as soon as it happens.

The DAX is also off the highs of yesterday but only by around 65 points and has held onto the break out levels with some ease. Support is at around 6985/95 some 40 points lower than current prices. On the upside the highs of yesterday at around 7100 will be the natural target but it must be said that after yesterday evening and this morning’s reversal that clients will be cautious of getting too bullish.

Currency markets followed the break outs and the Euro is now up at 1.2470 with short traders looking increasingly nervously at the Greece/German love in. If there continues to be no news (not necessarily bad news) then markets may continue to squeeze higher as bears get picked off. Resistance is just above us at 1.2485/90 and we may speculate that there are some stops in place close above this level.

Sterling ignored the prospects of further easing and QE and instead focused on the potential for higher debt rates which might make the currency more attractive. Base rates are unlikely to move but the yield curve may be subject to some steepening.

Our clients are actually the wrong way round of the currencies in early action having sold the euro and Sterling rallies yesterday evening. The bulk of positions are not far from current prices but I am sure there is some nervousness if the move gathers even more steam.

Gold also managed to break its trading range with a dramatic punch through the 1630 resistance level all the way to $1640 odd where we remain this morning. There is some old minor price resistance at around this level which bulls will have break into but the mood seems to be positive.

Once again the Equity markets are the poor relations in the investment game. Asset values between fixed income and stock are getting ever further stretched under the market manipulation of the central banks (ignore the Libor arguments, the constant global Central Bank interference in the bond markets over the last two years has caused massive dislocation in valuations on an unprecedented scale). With growth remaining weak and the ‘new order’ consensus of ever larger liquidity injections it is difficult to see how equities can ‘outperform’ as their base valuations are continually undermined by central bank monetary policy.
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Market Comment 22nd Aug 2012

The UK borrowing numbers pretty much confirmed what everyone suspected. 

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