Investors are trickling back to the more comfortable markets

Bets in the City / Simon Denham / 04 November 2008 / Leave a comment

Daily View - 4th November 2008

Markets look to be still on the comfortable side with investors continuing to creep back in. Banking stocks (aside from Barclays) had a goodish day yesterday but the news from France indicates the peril involved in taking the Queens Shilling. The French PM has announced that those banks that have taken public money should start to lend to the governments tune rather than take proper banking decisions about risk/reward.

The banks, in the main, got into trouble not because of their normal ongoing business, but because of a latter day love of involving themselves in ever more complex tools which then lead to the stalling of the interbank market as fear over credit-worthiness took over. If lending criteria now has to take account of political sensibilities then we can foresee an endemic level of bad and doubtful debt being built into the system. Governments love to control (that is why people become politicians after all!) and complete lack of any knowledge whatsoever about any sector has never been a bar to the State managing to throw good money after bad.

The Treasury now has some rather cheap investments in what are still global brands if the mandarins start to involve themselves in forcing the banks to lend (invest) in dubious business plans this investment may well go seriously whiffy.

M&S have seen profits drop by 43pc and the market seems to be comfortable with this! A triumph of PR, I feel, as the number (223.2m) whilst grim was a bit better than analysts forecast (around £211m). Nowadays analysts are almost banned from actually doing any 'real' investment investigation as this might be considered "inside information" for the recipients of the data. So much of the expectation on upcoming numbers is massaged into the market by the Finance Director's of the companies concerned. If you can convince the market that the number is going to be truly disastrous and then beat it a feeling of 'wow, they did better than we thought' pervades. A bit tongue in cheek but you know what I mean. Same store sales were off some 6pc which is slightly worse than market median and the outlook has, probably(!), not got better since the end of September.

AB Foods also reported showing a net revenue fall of just 3.3pc but Primark showed sales "gains" of over 4pc. The fall in revenue was mainly due to cost involved in headcount reduction or changes in EU tariff rules. The stock has fallen in line with the main markets but the 25pc high-to-now drop makes it one of the better retail focused performers.

With the BOE expected to cut by anything up to 1pc on Thursday the pound is having a truly awful week so far. This morning saw a low of 1.5600, down from the highs of last week at 1.6675, and the overall pressure to the downside will probably continue until such time as dealers believe the MPC is nearing the bottom of the rate cutting cycle (sometime next year). The volatility in the Cable market is becoming ever more extreme (even as the equity markets start to slow down a bit) with the last eleven trading days averaging over 5 cents a day high/low range (3pc). This variation represents a significant portion of the profit margin for many businesses and makes long term contract planning and pricing (i.e longer than 1 day!!) rather difficult.

Volume support for the pound versus the euro is at around 1.2400-1.2440 which is where we are now but this level has been aggressively breached twice in the last two months both of which moves took us sharply down to the 1.2200 level before bouncing violently higher.

Gold seems to have settled for the moment in the mid 720's having had a quiet day of it yesterday (in comparison with recent times). The commodity retains its 'safe haven' status but if we start to see a slowdown in the slowdown then, as per previous comments, the attraction may start to decline somewhat. The rally from the fall to $680 was quite restrained by recent standards and petered out at $775. The trading range of most of 2007 was 635 to 695 and this may be the defining level for the medium term. If this is breached then the way may be clear for a return to the $500-550 level. If it holds then a renewed bull move cannot be completely discounted.

The Tradefair Spread Betting Team