Tory leadership battle.. UK wins second prize in a beauty contest

Discussion in 'Market Commentary' started by SimonDenham, Jul 5, 2016.

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  1. SimonDenham

    SimonDenham Simon Denham CEO Mercor Index Staff Member

    The economists are out in force this morning with the first surveys of UK business confidence showing deep drops in sentiment and expectations for the year ahead.

    This is hardly surprising as every serious commentator, newspaper columnist, economist and analyst has been telling us this for the last two months and the hysterical actions of both the market and politicians has backed it up. It would be a touch odd if a senior business executive was not influenced negatively by the flow of negativity.

    Oddly enough though the immediate outlook might not be quite so bad as is portrayed. In the first place the UK already abides by all EU rules and will continue to do so until the date that the plug is pulled (indeed we will almost certainly continue to follow most EU directives even when we leave). On the financial side of the equation an exit may be ‘good’ for the city as the tidal wave of Mifid regulatory strictures will now cease at this point (anything new will not be implemented before the UK leaves) and so the UK can create it’s own regulatory structures that are more attuned to a major financial centre. And on top of this the pound has dropped about 10% which will give an immediate (but temporary) boost to production.

    The exit from the single market is less easily talked away though and whoever becomes Prime Minister will have to focus nearly all their effort on dealing with the ramifications. This will probably lead to paralysis in Government (no bad thing some people might say) as ministers try to push through the legal framework required.

    Which leads us on to the bun fight going on at the top table. Normally you can look at a list of candidates and think ‘oh, he/she would be OK’ but in the current situation this seems a tough choice. Not one of the five Tory candidates are remotely appetising and none are particularly ‘electable’. For all Cameron’s faults he at least looked and sounded the part. Unfortunately, the rather loathsome Leadsom and May look like being the ‘choice’ of champions.

    And then you come to the small table in the corner where what remains of the Labour party is fighting over possession of a rather gnawed bone. Corbyn and Angela Eagle are the players here which just goes to show that there is little that the Tories can do that labour cannot do even worse.

    Many commentators this morning seem to have suddenly cottoned on to the Bond yield event of the last few weeks and are drawing a direct line from sovereign yields and recessionary indicators. I am not sure about this as yields are low for reasons not aligned with economic performance (QE and zero/negative interest rates). Some have mentioned that this would normally indicate a high probability of Global recession and have been surprised by the equity market strength. But another factor may also be in play. Virtually every single asset class in the world has gone through the roof except equities. In general the equity markets have not had the super surge of other assets.

    Economic Indicators

    As mentioned there have been a couple of rush job sentiment indicators in the UK which unsurprisingly show a drop from 112 to 105. The surprising thing about this is that it is still positive!

    Various reports out today with June PMI numbers out of Germany, France and the UK. Difficult to call them as they may or may not be influenced by June 23rd. But they are generally called pretty much flat from May.

    This afternoon we get the US durable goods numbers and the May Factory Orders release. These are expected to be weaker than April but not significantly so.

    Indices

    FTSE

    As we mentioned yesterday the markets were looking a bit toppy as the rally from the lows merely on a weak pound was a tad overdone. If Brexit does impact the economy (and the wider EU situation) then even supranational companies will suffer a bit and the fact that they can report in a devalued currency will only have a very temporary effect.


    Support is at 6485/95 and 6440/50 then 6370/80

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

    DAX

    Like the FTSE the Dax is struggling and as we commented yesterday it seemed unable to make headway above 9800. Since then we have pulled back to the 9600 level and the index is in all honesty not looking happy. This said the European markets are the only ones that have failed to retake their pre Brexit levels even though the same fiscal effects should be in play.

    Support is at 9570/80, 9520/30 then 9420/30

    Resistance is at 9665/75, 9805/15 then 9840/50 and 9945/55

    Dow

    As with all other indices the Dow is falling this morning as the hangover from the post Brexit bull fest seems to be setting in.

    Longs are taking profits and who can really blame them. The rally was unexpected and any unforeseen profit should be grabbed with both hands.

    Support at 17850/60, 17780/90 and 17610/20

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

    Currencies

    Euro

    The Euro cross seems happy at the current levels having failed at the resistance level at 1.1165/75 over the last few sessions. Woes for the currency would appear to be abating marginally but it must be said that the Eurozone is still only limping along.

    The pound is suffering badly in early action as the second bear phase seems to be about to gain traction. The Euro is not (this time following slowly in the pound’s wake and the pressure to sell is not in evidence.

    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

    Sterling

    As mentioned yesterday the bears were looking for their chance and tay have got it this morning. It appears that Ms Leadsom is the popular choice but she has already stated that she will not be party to any agreement over freedom of movement which will no doubt put a hole in any discussions of trade agreements. We are now at the lowest point since the exit vote and (frankly) not looking much like stopping here.

    Support is at 1.3150/60, 1.3115/25 1.3045/55

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

    Gold

    Somewhat surprisingly the renewed weakness in equity markets has not resulted in further gold price progression. We are off from yesterday’s close, still quite high, but not looking much like making a renewed push today.

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

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

    Oil

    Weakness in oil this morning as the continued supply of negative sentiment is starting to worry the consumption side of the argument.

    With the Middle East slowly edging away from the brink of total chaos production is likely to be picking up. Whilst there is not the resource there once was for maintenance and development which should impact well output in the medium term the reopening of wells across the region will slowly press on.

    Support is at 4875/85, 47.40/50, 46.60/70 and 45.35/45,
    Resistance is at 51.70/80 and 52.05/15
     

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