FTSE stays in current range

Daily Financial Analysis / Simon Denham / 09 February 2009 / Leave a comment

Daily Comment February 9th

The mid 4300's again proved too much for the FTSE just for the moment and rather like the mid to low 4000's the failure may confirm the current trading range for the time being. The UK senior index is building up very heavy resistance and support barriers and it is proving difficult to identify what will break us out.

The open this morning is at 4265, or thereabouts, about 25 off Fridays 16.30 close but there were hopes for more after a late rally in the US had indicated an opening above 4300. Unfortunately weak activity in the Far East has put a bit of a lid on this after more major companies indicated the need for further capital injections. The huge issuance required by the various state agencies across the globe may now be matched by the refinancing demands of the private sector. Debt to Equity levels may become ever more important as investors try to estimate the cost to various businesses of their ongoing borrowing requirements. It is all very well interest rates being at nought to one percent but corporate bonds are still trading at around the 6 to 10pc region.

Yields on Tesco 8 yr bonds (you would have thought Tesco one of the safer borrowers) are at 5.8 pc which is 0.5pc higher than April '07 when base rates were actually more than 4pc above today. Next plc 7yr are close to 10pc. If sterling manages to stabilise then we are looking at the possibility of borrowing to inflation spreads being around 10pc for quite reasonable issuers. This is not a sustainable level for any business with a heavy equity/debt ratio as they will be at the mercy of undercutting from competitors.

Barclays has come out with nice numbers and the market has responded with an 8pc rally up to 115p. I have stated before that the Board at Barclay are hardly likely to be outright lying about the valuations of their books and they would now have to be receiving the connivance of their auditors if this were the case. In the current environment auditors are not going to risk their own partnerships even to protect lucrative corporate work (although you suspect that there might have been a smidgeon of suspicion of this in times past).

This leads neatly onto the woes of the rest of the banking system. It is a truism that derivatives are generally a 'no net gain' product. For every winner there is a loser and vice versa. While the banks have been busily writing off all those CDO's, MBS's, Sub Prime lending bonds etc all the ire of the various Governments and journalists have been focused squarely on their problems to the avoidance of the other side of the coin. Somebody somewhere has made a great deal of money indeed. Yes, a few billions has been paid out in 'bonuses' but it must be assumed that the vast majority has been paid out to Builders, Surveyors, Smaller 'Mid Western' banks, Solicitors and (yes) borrowers. The smaller banks lent money on properties now known to have been vastly overvalued and to people unable to pay in the knowledge that the debt could be packaged up and sold on to the big investment banks on Wall Street (and then onto ever smaller and smaller investors). Yes the big houses should have done more homework on the underlying assets but they probably considered that the lender of 'First Resort' (the lending bank) would have at least valued the properties correctly. For all the incompetence of the Investment Banks at least their motives were merely profit not fraud.

Sterling has given up a little of its rally this morning after very early action might have indicated further strength. Weak sterling shorts were probably wiped out on Thursday and Friday and a pause for breath might now be the on the cards. Cable has rallied over 12 cents in the last two weeks and we are now back in the trading range that operated from mid November to Mid January. We have seen continued attempts to sell into the rising market as the analysts fell over themselves trying to write off the Pound. Two things should always be remembered about comment (mine included)...first there is a good chance that if a Fund has made the comment then he is talking his 'book' and second if an Analyst is good he would be trading rather than commenting.

The Euro is probably having the oddest activity at the moment. Most commentators expected it to rally versus the dollar in line with the Yen but conversely it has got a bit stuck in the 1.2750 to 1.3300 range. The problem with this type of activity is that you get left with the feeling that 'if it wont rally' when things are in its favour then what will happen went events turn sour?

Gold is slipping a bit once again as failure to move against the 930 resistance level is starting to take its toll. The aborted move on Thursday of last week was particularly disappointing as it might represent the first failed 'mini bounce' since November to record a new high. At $902 we are still very much in a bull phase but we might now be more inclined to have another look at the medium term uptrend line (currently at around $855) rather than a renewed attempt at the highs.