Daily Financial Analysis / Simon Denham / 29 January 2009 / Leave a comment

Daily Comment Thursday 28th January

Sterling is coming in for more pain this morning after the attempted rally failed at 1.4350 around the resistance levels mentioned in yesterdays comment. Just for once our punters seemed to have been watching the same charts as myself an there was considerable 'shorting' of the pound as we approached the level and most of this is still in place this morning as we sit at 1.4080.

George Soros was up to his old tricks at Davos. After stating how much money he had made out of the recent demise in the pound (when do these guys ever admit to a loss?) he then, apparently, went on to say that he did not believe the currency would fall much further. With such a ringing endorsement how can we resist? The momentum has been so Sterling negative for so long that we do tend to forget that you can actually buy and sell real things in Pounds. Sometimes you do have to look at things from an economic viewpoint. Whilst the UK does have a seriously shrunken (exporting) manufacturing base this does not disguise the fact that assets and produce from the UK are now looking very, very good value in global terms. The momentum may well take us significantly lower than here but in the long term Sterling is now undervalued.

The rally in the bank stock seems to have come as something of a surprise to the markets but even in dire situations there are reversals. Barclays, as commented here several times, are still a solvent going concern (unless the board is actually lying). At one point last week they were trading on less than one times earnings and this is in a bank with no State stake holding (therefore no divvy moratorium). The rally in Lloyds is less obvious (although the Citi upgrade to 'risky buy' has helped). HBOS has a poor loan book and with another year of the downturn to go (probably) there must be serious fears that the bank will have to go to the well at least one more time. Subordinated debt in Lloyds is trading at around 20 to 30 pc yield which is a truly astounding number and gives a real indication of the capital markets view on the possibility of nationalisation. Mind you RBS Subordinated Debt traded as low as 10c in the dollar last week giving a true yield of over 50pc. The bounce in RBS from 10p last week to 22p yesterday is still in the realms of hope over expectation.

The FTSE managed a nice little rally yesterday but this morning a bit of profit taking is coming out. 4300 is still a bit of an effort for the markets to beat even if banking shares manage to double in a couple of days. Clients are looking for a pull back in the market and have been selling the indices through yesterday and this morning. The open call this morning is at about 4280 off about 15 points and I have to say that although I believe there is value out there the current small bull move over the last three or four days is already looking a bit tired. Trading ranges are getting much more constrained and the days of 150 point high/lows day after day after day might be gone. Strong Support for the market remains down at 4000 but we now have some smaller support levels at 4250-4255 and 4130, to the upside the 4315-4325 resistance looks a tough nut to crack but ... if we do then 4395-4415 looks to be the next target level.

Gold slipped again yesterday, not much but the price action showed continued resistance to a move above $900. We managed one close above this mark on Monday but since then any approach to the 900 price has brought out solid selling. We have two scenarios here either a large number of weak shorts are built up which will allow a punch through 900 towards the all time highs again or the selling pressure will build up once more and confidence in further price appreciation evaporates. We have had a series of moves higher since October but we very much need to break above the 922-930 failed rally levels of last September. Because Gold has had such huge moves over the last few years we can tolerate quite extreme price shifts without damaging the overall trend. In the current medium turn rally we would have to trade below 835 to break the upward trend.

Oil continues to trade in the mid $40's and the price action contraction is now almost 'spooky'. The spread on closing price levels has been under 4 dollars for three weeks which makes the current volatility the lowest it has been for a good many years. Forward values are considerably higher than spot prices but the glut of deliverable crude continues to hold back 'front month' value. The last few months delivery has been at a massive discount to the next months trading price and dealers are fearful of the same effect for the coming months. As we move out of the winter high demand period expiry volatility may become even more interesting.

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