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UK stock market commentary (January 21, 2013): New week sees markets looking very perky indeed

We enter a new week with the markets looking very perky indeed as previous chart points have succumbed one after the other. This said it can hardly be claimed that the markets have been exactly exciting as each day has seemed to struggle to climb arthritically from one peak to the next.

The slow grind rather matches the political situation as the great and the good try to divert attention away from the economic situation (which they have proved pretty conclusively they can do nothing about) to domestic and international petty spats. In the case of the UK we spent a few weeks debating ad-nauseam the rights of Gay marriages, the Church’s response the Government’s view etc etc… now we have moved onto a kind of phoney war over Europe and whether we will have a ‘referendum’ on Britain’s membership. Here, also, we all know the answer. The population wants ‘out’ but business leaders and politicians (in general) want in. Whichever way the vote goes the chances of the UK actually pulling out are so small as to be virtually non-existent. An outright vote for exit will probably become a ‘policy’ then a ‘target’ and finally just a ‘possibility’. This one will, of course, run and run as there is little that divides the extreme wings of all parties more than EC membership.

The problem for the Tories is that they have a very vociferous minority who question continued EC participation and for the Labour party the difficulty is slightly different in that they cannot be too scathing about Tory disunity because they are well aware that the majority of their own voters probably agree with the right wingers on this point.

For the economy this might pan out quite well if attention is diverted elsewhere, as there is a good chance of the government doing nothing which is generally rather good for growth…. Or rather.. the other way around… there is little that is worse for an economy than politicians thinking they know how to run it.

The major issue for the western economies remains the huge burdens of the welfare state (or whatever the equivalents are called in France/Germany and the US) coupled with an aging population. If nothing is done to curb the ever rising GDP percentage taken up by hand outs (of whatever source) then debt and taxes will rise inexorably. But this writer fears that nothing will ever really get agreed in any country until they reach PIGS status and have the solution forced on them. Of course Greece had Germany to bail them out, I am not sure who is going to bail out France and the UK.

As mentioned this morning sees the markets pushing onto new highs and overnight we saw the FTSE 100 almost hit 6200. 6140-50 had previously been the peak of our ambitions and so we can speculate as to whether this level will form a support if we drift lower but on the upside there is minimal solid volume/price resistance until the mid 6200s around 6245/55. This said with new territory being explored we can hardly expect excitement as equity holders (wary of previous false dawns) are likely to lighten holdings and book some profits. So the track up to 6200 is likely to be tough.

The US markets have been similarly bullish with 2013 currently delivering 6% for the S&P. The overall positive move since the dark days of March 2009 is now nearly four years old (although it might not have felt like a bull market to many) but it is commonly held that bull markets run for seven. Interestingly the Dax is feeling a bit left in the kitchen at the party with 2013 (aside from the Gap on the opening day) being essentially sideways to down. With the entire trading range being covered by just 150 points.

Dealers will be watching for evidence of further contraction of the FTSE/DAX differential with speculation that the massive widening evidenced in 2012 might be in the process of unwinding. With the pound weakening and the Euro gaining strength the German economy, already faltering under the enormous debt and taxation pressures, is (for once) not getting any help from the currency just when it could do with it.

Currency markets as commented above have slipped into two groups the Euro and Dollar strengthening and the Yen, Swiss and Pound weakening (in fact the Eur/Swiss having managed a paltry 200 pip range through the entirety of 2012 has already managed 500 in the first two weeks of 2013). The Swiss central bank’s holding of the 1.20 line seems to be paying off at the moment and I can imagine that there is quite a bit of unwinding going on as Currency Funds get squeezed out of positions.

Cable continues to ‘weaken’ but in reality we are still very much in the trading range that has dominated since July 2010 (essentially 1.53 to 1.66). With the current price at 1.5870 we are pretty much bang in the middle. There is very strong support from 1.5815/1.5835 but it is a truism that currencies once they get moving tend to trend a long way for a long time.

The Yen has obviously been the biggest mover so far this year after hanging around the 76-84 range versus the dollar for most of the last two years the prospect of a print and spend government coming in at the next election has finally concentrated minds on the massive Yen deficit. The USD/JPY is now at just under 90.00 but the uber-bulls will be looking much higher than this at the 100 level and above> the Shorts are hoping for a pull back to correct some of the recent moves but it is fair to say that sellers do seem to be struggling to make much impact at the moment. There is good support at 89.30/40 and 88.90/10.