The Bank of England expects that house prices have seen the worst and that there are enough independent signals to indicate that the economy is in a position to grow into 2010.
The temptation to look into a few months of stable-to-mildly-rising house activity and to extrapolate this into a much sought-after upswing seems to have found a home with the central bankers as well. Unfortunately, the news from Continental Europe is not so sanguine with whole economies apparently teetering on the brink of disaster. Much as we like to think of Britain as an island unto itself the fact is that we are inextricably linked to the fortunes of the rest of the globe and to Europe in particular. Not surprisingly considering they are a mere 21 miles away as the crow flies.
The continued massive spending splurge of the Treasury and the BOE seems to be holding the dyke for the time being but the fear is that once the boy pulls his finger out of the leak the weight of accumulated debt will drag the UK economy back into the abyss.
On the other side of the Atlantic the news was equally grim with a net 450K people losing their jobs in June. While we can expect these blips on the upside it is surprising to see that the start of summer has seen such a cutback as this would normally be a good time for temporary holiday job prospects. On the plus side, those nice guys at Goldman Sachs et al seem to be doing very well indeed but there is a grim side to this piece of information as well. The unfortunate fact is that what business that is being transacted is being done, very much, in the bankers’ favour. With the virtual destruction of investment banking system in the States the survivors are able to make far bigger margins on their deals simply because clients now have few options. They are unable to play Goldman off against Citi or Merrills or Lehman etc.
The markets reacted, unsurprisingly, to the downside on the employment news but the FTSE failed yet again to break below 4200 and buyers are steadily drifting back into the market hoping for a repeat performance of the action of the last 10 days where the market has repeatedly hit the 4210 level (or thereabouts) and recovered back up to 4300. This morning sees our clients very heavily long of all the indices and the initial move is very nice for them with a return to the mid 4200’s in the FTSE 100 already. The US markets are closed for the Independence Day holiday and this is likely to make for slow but steady trend price movement.
In all of the virtual non-activity of the last few months in the FTSE the traders with the deepest pockets have been the winners as the constrained trading environment has made for very profitable short term position taking.
Oil fell heavily yesterday as well as we looked to weaker demand from the US in light of the fall in Non Farm Numbers. Here, again, the trading range is holding well as our comment a couple of weeks ago about the support at 66 bucks held good on the 22nd June and then the later comment on the resistance at $72 also holding firm on the 30th. Now we are back near to the support at 66 dollars and traders are looking to get long once more. Longs should be wary of a break below the support level as this may well indicate a quick return to the 50 to 55 buck region but for the moment client buying in early action is proving to be the right choice.
Sterling is also managing to sit tight against some serious tests of support. Cable has drifted sideways through the short term upward trend line which is marginally worrying and this may give cause for a move back into the 1.58 to 1.60 region but sometimes trend lines just lose their power (as a market cannot just move in one direction forever). The recent activity on cable may give bulls the hope that this is one of those times. At 1.6402-1.6405 the weight is still slightly to the downside which might restrict long position building for today at least. It must also be said that “when the US sneezes the UK catches a cold” and the employment numbers yesterday Stateside, coupled with quite a few headline job cuts over here in the last week, might make for some grim unemployment numbers next time around. Total’s complete refusal to negotiate the walk out of some of its contractors shows that the whip hand is very much with the employers in many sectors at the moment and this will almost certainly translate into low wage demands and acceptances in coming months/years.
Low earnings expectations and weak job prospects do not exactly bode well for a service sector economy. The pound may once again start to come under pressure in the coming weeks.
