Daily Financial Analysis / Simon Denham / 27 January 2009 / Leave a comment

Daily Comment Tuesday 27th January

Barclays managed a 70pc rally as the market seemed to decide that, possibly, the bank was telling the truth as opposed to the 'vague fears' spread by reporters and other 'interested parties'. Reading one 'august' commentator in the Evening Standard yesterday evening was an education in snide destruction. We hardly need 'short sellers' to crush values when bitter and poorly informed comment will do the job just as effectively!

Markets remain remarkably buoyant given the increasing tide of dire data and it may just be that the increasingly poor return on cash is driving more money towards the 'better' returns available in equity. This is, of course, a potentially dangerous game to play but when has this never been the case? Investing is always fraught with fear but at least returns on many shares now stand out versus cash.

My comment yesterday morning that I was a tad surprised at the market opening weaker was confirmed by the ensuing rally which ground on throughout the rest of the trading session and the FTSE finally closed out over 150 points to the good. This morning is likely to see some small reversal on the open (possibly 30 off) but this is normal after such a large daily run to the up side (or down for that matter). At 4185 we are back in the middle of the trading range mentioned many times over the last month or so between 4000 and 4350 and our clients are looking for a continuation of the current move and have remained long of the Index through the move yesterday.

There is not a great deal of information out of the UK today with only a small number of corporate announcements to brighten the morning. GKN comes with a trading statement and investors will be hoping for some relief after the last ten negative trading days in a row have taken the stock from 118p down to 73p (not quite new lows but challenging the dire prices at the worst of the rout last year). Even the general market rally yesterday did not find an echo for the stock as we lost another penny during the session. Oddly enough expectations are not that gloomy for the company but the announcement on the 5th January that they had taken control of the Airbus wing component unit at Filton seemed to remind investors of the potential pitfalls with such a high capital cost acquisition.

Sterling also managed to rebound from the lows early in yesterday's session and we are now back 'up' at 1.4040-1.4043. There seems to be a sort of 'doomsters' battle going on at the moment with some commentators calling for the death of the Pound and others, quite forcefully, pointing out that such talk is absurd. As always the truth is probably somewhere in the middle, the UK economy seems to be in a uniquely weak position on the global stage with very little to promote Sterling bulls, not only this but the momentum of the last year is still very definitely in place and the pound continues to trend lower. Economists point out that the manufacturing base of the UK is still 13pc of the economy and has every chance (with such a weak currency) of making a very belated comeback after decades of decline. Unfortunately the advantages of a weak currency are only really evident when global demand is reasonably robust, it does not matter if your produce is technically cheap if there is no demand to buy it. On the other hand other economies (with much bigger exporting bases) will be suffering as well and many will not have a falling currency to help them out. This writer has (as readers will know) been wary of the pound for a long time but, since the turn of the year, I have found it increasingly difficult to justify some of the more dramatic comment out there. The support at 1.3550 to 1.3600 vs the dollar held again yesterday and the ensuing rally showed that there are some weak Sterling 'shorts' out there and whilst I am not exactly suggesting a strong rally we may find that dealers discover that the easier direction is up rather than down.

Gold has regained the 900 level which seems a bit odd given that other asset classes are looking a bit more stable at the moment. Shorts (as in Sterling) are getting squeezed mercilessly and the potential for an extension rally to the current move must be considered high. On the other hand if (I admit this is a big IF) global markets do stabalise the rush out of the Yellow Metal could be dramatic. The downward trendline from last February goes through at around $925 which is also the high of Sept/Oct last year when the market failed three or four times to break through into higher ground. A close above 925 may signal a renewed bull run but we are likely to see some solid resistance to such a move. The market is opening at around $907 this morning.

Oil continues to trade in very wide daily price ranges with yesterday typical of recent activity. The high/low range was just shy of 300 cents which seems to be just about the low of the average session spread. Oil is trading in a range of over 8pc every single session and while this is certainly exciting it is definately not normal. Since the highs of July last year we have got used to excessive activity but this is not conducive to serious risk management for end users. Finance Directors trying to buy in forward risk are forced to put up so much margin that the cost of long term cover is prohibitive. The closing price momentum seems to be settling down, at least, and we have now spent almost two months in a range between 38.50 and 50.00 (closing price). For all of the calls for 25 bucks from some and 80 bucks from others the price is hopefully flat lining in the mid 40's.

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