Daily Financial Analysis / Simon Denham / 06 February 2009 / Leave a comment

Daily Comment Friday February 6th

Whilst the Bank did what the market expected there is now a large contingent who believe that more cuts and any move lower towards zero interest rates will be a huge over reaction by the UK's central bank. So far in their relatively sort lived life time as an independent bank they have not exactly covered themselves in glory as we will all remember only a year ago the UK base rate was still over 5% when the major concern for the MPC was inflation! The circumstances have changed at such an alarming pace in the last 12 months that it has even led to rate cuts being made outside their normal meetings in order to get the banking system functioning properly again. We should just about start to see the action of the big cuts back in October and November but we're still a few months off from seeing the full effect.

However, as the pessimists of these rate cuts point out they benefit the few and punish the many with those lucky enough to have tracker mortgages being the only people better off and the ever increasing number of retired, who rely on income from savings and annuities, being the worse off.

The problem still lies in the banks being able to function as banks. What the BOE is doing is preventing them from charging for their money and whilst the consumer is struggling both from a back log of debt and now many without a job the banks cannot just give away their money. Rate cuts are one thing, but what will really assist the economy getting back on its feet is the flow of credit.

On the plus side there are already some slightly more optimistic views about the recovery (but the use of the "R" word comes with a huge note of caution, as we're not seeing an "R" yet) filtering into the press and amongst economists in the City. Yesterday's rise in house prices for January came as a surprise and whilst it does not mean the trend downwards is not over (there were 3 consecutive monthly rises in house prices during the last downturn in 1989/1990) it is possibly an indication that things maybe bottoming. There are also more brokers becoming overweight the retail sector with claims that the worst is over for them - hard to believe but their views are 6 months down the line and they believe that picking up stock at these levels will be serving them well towards the end of 2009. We have also seen a slight up tick in some important survey data, in particular the PMI which has at least stopped falling and even ticked up in the US and UK in their last readings. PMI is followed closely by many who believe it to be a good indicator as to what happens to GDP a few months down the line.

On to the markets and the FTSE is better this morning marking a new weekly high and even staged a very strong recovery towards the end of trading yesterday. In the US investors seem to be repeatedly happy to pick up stock when ever the Dow dips below 8000 indicating that a great deal of support seems to be being built up.

Today might see a test of either support of resistance levels as US non farm payrolls are released at 13h30 London time. The headline figure is expected to come in at -540k although other calls are for -500k (last month's decline was -524k) and increasingly the market is focusing on the overall rate of unemployment, due to rise from 7.2% to 7.5%.

Gold made further attempts at breaching the $920 mark without success, every time it makes a run at it the level gets rejected but another test can't be ruled out and if we go through $920 the next test will be $930, but such a breach will be good for the bulls as many expect a test of $1000 if the $920/$930 region is taken out.

Sterling is having a good run despite the rate cuts and testing resistance against the dollar sitting at $1.4750 at the time of writing. A big spike higher this morning in early London trade has given the sterling bulls something to cheer about but the move could also be down to a degree of short covering. Against the euro things are looking better for sterling too as we sit at 0.8670.