Independence Day ... translation... low volumes-minimal interest

Discussion in 'Market Commentary' started by SimonDenham, Jul 4, 2016.

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  1. SimonDenham

    SimonDenham Simon Denham CEO Mercor Index Staff Member

    After the surge in UK equity and bond markets there may be more countries queuing up to get downgraded by the ratings agencies. At one point on Friday 10 year gilt yields were trading at 0.75% and short sterling futures, out to Jun 2018, are indicating that rates will be around 0.25%. Of course they could actually be negative by then.

    This is in spite of the near certainty that inflation will spike higher over the next year with many analysts estimating 4% buy summer 2017 as the weakness in Sterling feeds through into increased import prices.

    Virtually every major index has now recovered from the Brexit surprise although as we have mentioned before this hides a good deal of muck.

    Barclays has been a good example falling 20% from what was already a pretty dire position. The decision to focus on moving back to core markets in the UK and disposing of hard fought for global assets has come home to roost. When this commentator heard that the new CEO was following this policy we made a few caustic comments and then, when it then emerged that Bob Diamond was involved in picking up some of the disposals, I am afraid that I instinctively knew which horse I would rather have my money on. Now the idea of more domestic risk looks like one of the big banking doo-doos of the last few years. And there is no shortage of those.

    Building companies have also come something of a cropper but (let’s be honest) this was always going to happen at some point. Taylor Wimpey (for example) is off some 25% and is now on a rating of under 10 p/e. Like many builders they have invested earnings in land banks and, for the moment, there is some concern that this might have been acquired at too much of a premium. On the other hand with rates likely to be pretty close to bugger all for a very long time even the minimum wage could now almost pay the interest for a million pound property! So the likelihood of a collapse in housing is probably limited AND whilst we may stop a few EU immigrants in three or four years time Brexit will have absolutely no effect at all on the 50% that come from elsewhere.

    The FTSE 250, a more UK centric index than the FTSE 100, is currently at around 16500 which is about 3.5% off from the pre vote level. In normal times this would hardly even be considered a correction let alone a disaster.

    Economic Data

    Today is Independence day when the US celebrates one of the previous Brexit decisions and the UK remembers how big and powerful we would now be if our leaders back in the 18th century had been more flexible. Maybe there is a moral in there for the current EU leaders.

    There is no data at all out of Europe the UK or the US today so we are on our own.



    All the indices continue to power higher as the increased expectations for zero rate moves for the foreseeable future make equities more palatable. The FTSE is gaining even more on the Sterling weakness but to be honest this is something of a double edged sword as inflationary outlook may devalue any short term benefits.

    This said the FTSE is at its high for nearly a year and looks reasonably well set but the move of the last week has been surprising to say the least and so there is the potential for a pull back at some point. The benefits of a weak pound for foreign earnings can be over stated especially as the weakness in the currency for the previous two years had no such similar impact (even though we did comment on it occasionally).

    Support is at 6575/85 then 6485/95 and 6440/50

    Resistance is at 6620/30 then 6675/85 and 6745/55


    Like the FTSE the Dax has recovered from some of the fall out but not all. It seems nervous about pushing on from current levels with the index struggling to follow the FTSE and US markets higher.

    On a corporate level it seems that the Germans have more to lose from the UK leaving than do the big UK exporters. Apparently 20% of German car exports go to the UK which is almost unbelievable when you come to think about it. With 0.9% of the world’s population we take 20% of all German car exports. The simple fact is that the UK imports huge numbers of ‘big ticket’ items from the EU. If a deal is not done with the EU on free trade the UK will hurt but so will corporate EU.

    Support is at 9740/50, 9655/65 then 9520/30

    Resistance is at 9805/15 then 9840/50 and 9945/55


    The dow’s love hate relationship with the 18,000 level looks like being tested again with the index once more just under the mark. Over the last 18 months we have had numerous attempts at the 1800-18300 range but all of them have come to nothing. Most of the time the Fed has been the grit in the gears as renewed fears of higher rates hold us back. This time it is hard to see the Fed being a factor in the medium term as hardly anyone is now thinking in terms of interest rate action.

    The great financial crisis of 2008/09 now looks like a small blip lower when compared to the huge rally since then but looking at the medium term charts the technical chartists will be worrying about the W formation since mid 2015 as it would seem to indicate that the 18100-300 level is about as far as we can go for the time being.

    Support at 17930/40, 17780/90 and 17610/20

    Resistance is at 18050/60 18150/60 then 18300/20



    The Euro cross seems happy at the current levels having failed at the resistance level at 1.1165/75 over the last few sessions. With the pound recovering a bit woes for the currency would appear to be abating marginally but it must be said that the Eurozone was limping along anyway and the impact of the UK’s action may actually harm them more than it harms the UK.

    If the UK exits from the EU the overbearing effects of the German economy (already huge) will get even bigger. With fault lines opening between the big two (France and Germany) the stresses on holding the entire zone together may become more pressurised. Politically they can blame Britain for a while but if the effect in Europe is to slow what small increases in employment as we have seen in the last few months the clamour for more radical solutions may become louder. Many months ago it was mentioned that the Euro may be switched into an A and B currency with the Garlic belt and Eastern Europe in the ‘B’ unit and the Northern Countries in the ‘A’.

    It is tempting to think that this possibility may rear its head again if the south continues to underperform the north.

    Support is at 1.1005/15 then 1.0970/80 and 1.0890/00

    Resistance is at 1.1165/75 and 1.1245/50 then 1.1315/25


    The pound remains at the lower end of the trading range and the bears will no doubt be watching for more signs of weakness. The bounce back above 1.3400 which had been looking rather nice was obviously smashed out of court by Mr Carney’s comments (even though we did actually already know this). Interest rates in the UK may even go as low as the Euro (unlikely but possible) and international holders would probably prefer Euros at zero percent to Pounds at zero percent!

    Support is at 1.3270/80 then 1.3205/10 and 1.3115/25

    Resistance is at 1.3345/55, 1.3450/60 then 1.3530/40 and 1.3570/80


    Gold continued to move higher and our clients continued to buy. We must have a lot of happy traders out there at the moment!

    Today the metal has tried the high of last Friday but has for the time being at least decide that there is just not enough momentum to push up just yet.

    Support at 1320/22, 1312/14 then 1298/00 and 1286/88

    Resistance is at 1355/57, 1372/74 and 1386/88


    Oil is stuck at around the 50 buck level

    As we said last week

    “Buyers are still around but so is the production surplus. Probably means we are going nowhere fast.”

    Support is at 4920/30, 47.40/50, 46.60/70 and 45.35/45,
    Resistance is at 51.70/80 and 52.05/15

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