Sterling is pounded to all new lows

Bets in the City / Simon Denham / 11 December 2008 / Leave a comment

Daily View - 11th December 2008

A bit late this morning due to 'signal failure' but at least I managed to read the Torygraph from cover to cover for once.

The markets suddenly seem to be feeling a tad cold as traders start to shut down for the holiday period. I understand that most trading floors have closed their books and are merely rolling over existing business with virtually no new position taking being contemplated. It is to be hoped that this is just the usual year end shutting up shop and that come the New Year activity will rebound. Unfortunately there is a slight feeling that the bright new era of massive state packages coupled with massive private indebtedness will prove to be not much different to the current dire situation but without one crucial element. Hope.

The next decade (and when I say decade that is what I mean) is likely to be blighted with high taxation and increasing state borrowing requirements. Even the Chancellor was unable to be more positive than "around 2014/15" for a return to a more respectable annual debt level, but this will of course be on top of the huge obligation built up between now and then. If a politician is saying 2014/15 he probably means 2017/18. This may well prove to be disastrous for anyone working over the next 20 to 30 years (i.e. nearly everyone) as the chances of putting away a little something for retirement and have that 'little something' actually increase in real value will be minimal.

Volumes are very weak today with no real impetus for bulls or bears to grab on to. The weakness in the pound is contributing to the strength in the FTSE 100 versus other indices as most of the revenue earned by the constituent members and most of their business takes place in foreign currencies and on foreign soil. For investors looking for fair value on an equity whose market stall is the world there must be parity valuation. So a stock priced in pounds should (theoretically) rally against one priced in the Euro as Sterling slumps. Not only that but if head office costs are in the UK but income is mainly offshore these will be reducing as an overall percentage of total above the line expenditure making the final revenue number even more impressive.

Punters continue to trade the ranges this morning with some solid buying as the FTSE fell in early activity. We are now off some 35 points at 4335 but have been lower at 4310 which gave dealers an opportunity to get in at better levels. Whether we can hold above 4300 is the question on everyone's mind especially as the Dow and S&P have given up quite a bit of the recent rally over the last session.

Much of the news in the papers today has been concerning the weakness in the pound (as if that was new!) as the value of the currency reaches a new all time world low (put that in your "we are better placed that everyone else to weather the downturn" pipe please Mr Brown). Obviously the people who really matter in these instances do not believe a word of our political masters one bit. At some point the currency will return to stability but this is unlikely until such time as UK assets become such good value to foreign buyers that the flow of Sterling sales turns around. As mentioned yesterday, though, there was a good buying opportunity in Sterling versus the dollar as the support at 1.4660 looked to be holding. For once our clients appeared to be reading the runes and there was some solid long building yesterday and in the early hours this morning. With the pound now at 1.4961-4.4964 our clients are patting themselves on the back.

Gold continues to strengthen as returns on US Treasury bills go under zero for the first time in history. The Fed must feel that Christmas has come early as they can actually borrow money and be paid to do so. Rather useful considering the efforts they are going to, to increase banking liquidity.

We are now likely to enter a race to the bottom in terms of state debt valuations as spooked investors pull out of any weak borrowers and pile into the strong. This may come as something of a shock to Italy, Spain and, yes, the UK as there is a possibility that borrowing rates for them will actually increase as base rates fall.

The Tradefair Spread Betting Team