Is America's new leader up to the economic challenge?

Bets in the City / Simon Denham / 05 November 2008 / Leave a comment

Daily View - 5th Novemeber 2008

So, the interminable US election is finally out of the way and Barak has confounded the sceptics (of which, I admit, I was one) and passed the finishing line first.

Unfortunately for the new leader, for all of the hope and weight of expectation draped around his shoulders there is, initially, little that he can do (aside from the fact he does not actually take up his post until January, of course) to alter the momentum of the slowdown that he faces.

There seems to be a 'new perception' amongst US voters that would welcome greater Government intervention in their lives even if this means higher taxation and this is understandable given the huge sums paid to themselves by the top tier management structure throughout the US. In the UK a FTSE 100 COE, controlling a company that employs tens of thousands of people, gets it in the neck from the press and public if he/she is paid much more than a couple of million (whilst at the same time football supporters urge their team's board members to pay upwards of £5m a year to a spotty teenager to kick a ball around). In the US these sums would not even get you onto a table at the back of the hall.

Unfortunately big government does not go hand in hand with high profit margins and, given that the average US citizen must arrange his own pension, a President who does not preside over a rising stock market is, longterm, in deep trouble.

It is a moot point as to how long the current banking crisis will take to build itself up to the level where financial institutions feel strong enough to begin large scale lending again but with major manufacturers in the US teetering on the brink of oblivion the US administration (of whatever hue) might find scarce resources sucked into propping up ailing behemoths. Banks might be 'too big to be allowed to fail' for the sake of the overall economy but the same might be said for some corporations who employ not just hundreds of thousands of people but millions in connected suppliers below the line and retailers above it. In the UK various governments in the seventies almost bankrupted the country pouring money into the various state owned industries. A new president in a tough situation might find the difficult decisions, so early in his administration, easier to dodge that to address.

The FTSE is opening a full 100 points lower this morning at 4540 as optimism takes a bit of a battering. The FTSE was being quoted at 4670 at nine last night but Redrow's and Next's poor trading news did not help. The target for the bulls is obviously the magic '5000' level but we will probably need a bit more good news if we are to get here by the year end.

We seem to have returned to the kind of phoney war scenario that dominated the market between January and May this year. We know that there is bad news out there but we are not sure how much it will impact thinking/sentiment/values etc. Have we reached the bottom? Is this just a bear market rally? Why doesn't Claudia Schiffer return my phone calls? These are all questions for which we want the answers, but which remain elusive.

Traders continue to battle it out in the trading sessions and, to be fair, our clients have managed a very good fist of the recent rally and the turnaround last night. Longs have dominated for the past week or so and the bears only took the upper hand (for the first time in five or six days) towards the end of last night's session. The only fly in the ointment of the trading session yesterday, for the economy as a whole, was the big oil and gold rally. Oil, for obvious reasons, is always better for the West at cheaper prices but the rally in Gold was strange given its propensity to be a reverse indicator to woes elsewhere. If things are getting better why a move into the protection afforded by the Yellow Metal?

Obviously a sizeable slug of players believes that the current recovery is just a bull hiatus in a longer term bear scenario. The focus on Gold now returns to the $775 resistance, mentioned yesterday, which is likely to prove a barrier but the $745 level once broken in yesterday's session proved a spring board for a further, sharp, 25 dollar move. If we can break 775 there might be a similar reaction. Conversely (and there is always a downside) continued failure to make progress may hand the momentum back to the bears who have been (overall) in the ascendancy since March.

Trading remains volatile in virtually every asset class but the ranges being traded and re-traded do not seem to be being broken. This is the first small indication that, possibly, things might be about to quieten down (in fact the volatility index, the Vix, has fallen significantly in the last few days). Hopefully the period toward Christmas might be slightly more peaceful.

The Tradefair Spread Betting Team