Financials / Editor / 17 October 2008 / Leave a comment

Daily View - 17th October 2008

Perhaps a quiet opening this morning?

The markets look to be coming in around 150 pips higher on the FTSE in response to the US rally last night but the lack of activity over in the Far East might be the more important indicator. The Nikkei traded in a miserly 175 point range and in fact, aside from the opening and closing spikes, sat in a 100 point tunnel for the entire session.

There will, no doubt be further horror stories from the banking/insurance sector to be unearthed in coming weeks and months but the stability of the global financial system should settle down in the face of the huge injections being put in place. Libor rates are still very high (although they are falling it is painfully slow) and this coupled with the constraints on national budgets caused by the bolstering of the financial systems will probably mean that the potential for State sponsored growth initiatives will be limited.

Gordon Brown has already stated that there will be no cuts in public sector spending but the money must come from somewhere. The desperate hope will be that the slow-down will be of limited impact and limited period and that the recovery will defray the increases in Public Sector debt but if this is not the case the effect on the long term finances of the UK may well be severe.

Markets

As mentioned the FTSE is opening well up today and bulls will be hoping that the second violent bounce from the 3820 level might have set up a 'double bottom' formation. By any calculation (as mentioned yesterday) stocks are good value which we might hope will bring in some support buying. With interest rates likely to fall to around 3pc at least dividend yields of well over 5pc are 'ten a penny' at the moment which will probably start to attract the longer term players.

As stated earlier in the week... whilst this may not be the bottom that does not mean that, on a long term outlook, equity prices might be worth a small (emphasis on small) dabble for the investment portfolio.

There is a distinct lack of any information to go on this morning so we might well find that any 'longs' overnight will be quick to take the money and run which may lead to an initial sell off. But it would not be unreasonable to speculate on a little bit of peace and quiet (relatively speaking) until the US come in this afternoon.

As mentioned the FTSE has formed a double bottom at 3820 and the US market similarly do not appear to like staying below 8500 in the Dow and 900 in the S&P (roughly). Huge rallies in bear markets are well documented but it is always advisable to be cautious. Lows in equity markets are generally reached some 8 to 12 months before the end of an economic slowdown as market professionals try to look 'through' current woes into a rosier future. Unfortunately at this point in time we are actually only just entering any recession I know it seems like the financial disaster has been going on for ever but the impact is only now entering the mainstream economy. Too early to be calling the end of the bear market.

On the currency front the majors are looking quite happy with the general levels reached over the last few sessions. The dollar/yen cross at around 101.00, cable at 1.7350 and Euro at 1.3475 represent mid points (more or less) of the last two weeks and punters are weighing up the probabilities of whether the dollar and yen strength has further to run. With the interest rates of the US, UK and Euroland likely to be narrowing in on Japan over the medium to longer term the attractions of net cash outflow blocs against the exporters might become more difficult to justify. Upward pressure on the huge manufacturing and commodity exporting currencies in the Far East and Oceania is unlikely to just evaporate.

My comment yesterday on the strange inability of Gold to Rally in the face of the huge falls in equity markets and fearing that 'if it won't go up it will probably go down' came to fruition almost immediately with an afternoon sell off in the Yellow Metal taking it down from the opening levels at $840 to a session low at $785. It has bounced slightly from this point and is clinging onto an 800 handle this morning but buyers are getting nervous of the current lack of support. Tales of IFA's recommending bullion purchases to their retail clients might be taken by the cynics amongst us as a good indication that the top has been reached!

Calls from politicians (who ought to know better but who need to blame someone) for petrol stations to match forecourt prices from eighteen months ago as Oil has fallen back to these prices ignore two rather vital issues. Costs will have risen by at least inflation since then and the pound is around 5pc lower than early 2007. As oil is priced in dollars this means that the raw material is that much more expensive. If Mr Brown wishes for cheaper fuel to boost the economy the best way would be to cut the obscene rake that the Government takes (about 80pc of the price).

The Tradefair Spread Betting Team