Daily Financial Analysis / Simon Denham / 08 June 2009 / Leave a comment

Daily Comment Monday 8th June

Markets look weak again this morning as the economic news starts to deteriorate once again. For all the reading of the tealeaves in the 'confidence indicators' over recent weeks the stark fact is that by every other measure the economy is still on the way down.

The FTSE once again managed to hit the 4500 level on Friday after the better than expected NFP numbers gave hope that the US economy was reaching a nadir but sometimes you have to stand back and wonder at the 'expected' numbers. Forecasts for the NFP seem to be stuck in the pus 500,000 level when even the most pessimistic evaluator should realise that the jobs being lost now are the 'hard decision' ones.

After years of growth the initial job loss numbers were bloated by the fact that most companies had accrued quite a large number of non-essential (and even downright useless) employees. In good times these people can be accommodated but they are easy to remove in the first shake out. We are now into the realm of cutting more important employees purely to cut costs for survival rather than the top line protection of previous culls. A 300K cut in Non Farm Payroll is still grim, especially as the next slug of school/college leavers is about to hit the Sits Wanted list.

In the UK the fallout from the elections is still settling and Gordon Brown now has to survive his Back Benchers (who must be fearing for their feather bedded incomes at the next election). It must be recognised that a man who waited for ten years to get the top job is not going to resign no matter how bad things become. The only way that 'Our Gordon' is going to leave office before the next election is via an "Et tu Brutus" moment from a trusted friend and colleague. The problem for the country is that it is difficult to see anything even remotely approaching quality from those standing in the wings. It seems, in the UK, that all our politicians are good at is being politicians. Wonderful if all you need is someone who is good in an argument but pretty useless when you are looking for gifted administrators.

In France and Germany most of the political elite have been trained through university and beyond in how to actually run the state. In the UK it seems that anyone with an ability at disputation and a cast iron bladder (enabling permanent presence in any committee meeting) has a chance of election.

Sterling continues to fall from the highs of last week with Cable now at 1.5850 (having hit 1.6660 on Wednesday). While this seems grim it must be noted that if we go back another week we are just back at these levels. The rise and fall of the pound has been particularly dramatic of recent days and we can now look at the rally in the light of being, possibly, a bear squeeze rather than a move of any significance. We are now dangerously close to moving back into the old trading range below 1.5960 and dealers should beware any pre-emptive buying in aggressive size. It took quite a bit of effort to break above 1.5960 a couple of weeks ago and when we did the reaction was extreme (as already noted). This morning traders have sold the cross straight through the support at this level and we must hope that the reaction is not just as violent on the way down.

As mentioned the indices are looking weak this morning as the weekend press concentrated on the pitfalls still to come rather than the hope for renewal (which has been the refrain for a while now). Unfortunately the grim side is an easy roll to fall into especially as employment continues to be under pressure. Personal debt levels in the UK and US are not falling at all and the lower interest rates and falling confidence do not seem to be translating into debt repayment. In this the population is merely reflecting their political lords and masters as the huge stimulus package continue to wind its way through the gut of the economy. We are now into the waiting game period of the campaign as we try to analysis whether all the manoeuvring will give growth the upper hand. Unfortunately (again) the firepower of the UK is pretty much spent so if the 'green shoots' turn out to be nothing of the sort then the consequences may be dire.

Investors may once again decide to sit it out and pile up the cash.

Oil is slipping again today as reports over energy consumption continue to show dramatic reductions. OPEC did mention recently that they were seeing no increase in demand which would explain the recent rally and, with inventories still showing robust health, sellers may be finding the going a bit easier than of late. The big rally of the last two weeks (from $59 to just shy of $70) may well unravel as fast as sterling's decline of the last few days. This said it must be mentioned that the target of $75 is temptingly close, even now, and rather as with Cable and the FTSE it would be a foolish trader who played to win too hard.

This commentators fears over gold came to pass with a vengeance on Friday with a 25 buck fall pushing us well away from the $1000 region and back down to 950 bucks. As mentioned, there appeared to be no appetite to buy above 990 with, seemingly, everyone stepping back expecting somebody else to push the price higher. Today gold is down again at 948 and the charts for the Yellow Metal is showing remarkable similarities with Oil and Cable. The sudden increase in volatility in a wide selection of asset classes over the past week is not good news for the burgeoning growth scenario and we must hope that it is merely a bit of early summer illiquidity.