Daily Financial Analysis / Simon Denham / 23 March 2009 / Leave a comment

Daily Comment Monday 23rd March

Markets have bounced back from Friday's unexpected falls and traders will be asking whether the continued failures to break back down (makes a change!) are evidence that a base might be in the process of being constructed. The announcement over the weekend of the new 'asset cleansing' initiative by the central banks is giving renewed hope to battering banking stock and other sectors are taking their lead from them.

At the moment the bulls have it but we are still sitting in a deep dark hole when we discuss renewed appetite for bank lending. Unfortunately for all the desire for massive regulatory clampdowns on banking activity the authorities must be made to realise that they cannot have their cake and eat it. If you require banks to put up more capital, spend vast sums on FSA reporting, require approval from authorities for off balance sheet activity, restrict lending to multiples of earnings etc (to name but a few of the various recommendations) then say "oh, do all this AND increase lending levels" even the most intellectually challenged of readers would identify a 'slight' flaw in the arguments.

Oddly enough now might not be the time to allow the Lord Turners or Hector Sants of the world any input at all. Lessons have been learned, most bank boards will be very acutely aware of the renewed dangers of some of the traded instruments and there is a very strong argument that the best route forward would be to let well alone.

As mentioned many times over the last month in this comment there are a number of very choice morsels out there for investors willing to look through any short term reverses. And yields on some equities are starting to make state debt look extremely expensive. There are many corporates, with little or no debt, offering yields of above 5pc. If just a smidgeon of confidence returns then markets could be substantially higher in very short order.

The FTSE is trading 60 higher in early action but this must be compared to the closing call on Friday night for 50 lower. Punters will be very pleased as most went into the weekend long and suffering only to wake up today sitting on a nice little earner. There will no doubt be an initial period of profit taking but the markets do look to have the bit between their teeth. As mentioned last week, very bad news is not having its usual effect and it is in this environment where markets can finally attempt to (if not build) at least pause for breathe. On the employment front the news is likely to get considerably worse and, unfortunately, there is little that can be done about this in the short term. For the UK the main fear is that the government will do what it has done for the last 12 years and just throw money at the problem. Sometimes the best answer is to do nothing, let the wounded heal themselves and then throw money at the survivors.

The dollar is weaker again as the new toxic debt ideas are likely to lead to even more printing and the Pound is doing its best to recover some of its lost ground. At 1.4570 the cross is looking solid but traders should be aware that the 1.4620-1.4660 resistance range held once again last night. This makes three attempts in three trading sessions to break higher. The pressure is very strong to the upside versus the dollar and a breach above 1.4660 might be a trigger for another big move BUT traders should worry if we do not make the move soon as fatigue could set in.

The Euro continues to strengthen against all comers but (as with the pound) there is strong resistance just above current levels. We have peaked at around 1.3740 three sessions in a row as well and while the recent move higher must have cleaned out all of the weak shorts this should not detract from the point that Euroland does have its problems. Stresses within the Eurobloc are not going to go away and as the employment situation gets worse national governments may well start to make damaging local decisions.