Daily Financial Analysis / Simon Denham / 11 February 2009 / Leave a comment

Daily Comment Wednesday 11th February

So the senate has passed the stimulus bill and we must now await with bated breath for its effects to take place. Of course, with the economy in the US bleeding jobs at an ever increasing rate any form of fire wall must be considered but spending over $800 billion on top of the money already allocated to bank liquidity easing (was it $700 billion? But what is the odd 100 billion between friends) might be a step too far even for the USA.

The fear must now be that, even if the plan works and growth does return to the economy, future growth will be severely impacted and the ability to rise out of any downturns to come will be very restricted. The West is in danger of handing a lead weight to the prosperity of tomorrow. Pictures of the Titan Atlas forever condemned to hold the celestial heavens come to mind. The piling of debt upon debt cannot surely be the correct solution and the Fed will now have to steer a very dangerous course indeed between, on the one hand, a Japanese style 20 years deflationary stagnation and on the other the release of not just the inflation genie but also the hyper-inflationary djinn. To combine huge new spending with massive new tax cuts when investment liquidity is not exactly just lying around risks starving the corporate sector of the ability to tap into the capital markets. One of the danger with such massive issuance is that it will cause a heavily positive yield curve in the US TBond markets and this will tempt the US Treasury into issuing shorter than usual term Bonds which could well mean a never ending tidal wave of new and expiring refinancing issuance.

President Obama is starting to get a bit of the doomster feel about him. Every time he speaks on the economy/stimulus package the markets react with a heavy fall. The dealing team are almost tempted to start selling the moment they see him appear on Bloomberg TV.

To add to the woes China's latest numbers this morning make grim reading indeed with exports continuing to slide sharply (shipments were down 17pc in January), imports dropping an almost unbelievable 21.3pc and yet money supply surging by 17pc as the various state enterprises resort to the fiscal printing press to keep growth in place. Stories of a possible 40m unemployed concentrated in failing industrial centres will not help stability in a country that has become used to stellar growth.

Markets this morning are not surprisingly called lower after the US fell out of bed last night but the total damage to the FTSE 100 has actually been quite muted so far. There is a fear of a serious overhang of stock on the open after the closing auction knocked 27 points off the index ( a new record outside of 'Fat Finger' errors) but with the market called 40 lower anyway, at 4170, there are likely to be buyers around. We look to be opening below the support level of between 4180 and 4225 and this will be the first serious problem. If we cannot recover to above these levels soon then selling pressure may increase throughout the session. The huge support at around 3980 to 4000 is not even in sight just yet so a return to a full bear phase is not yet on the cards.

As with yesterday's comment there does seem to be a sort of eerie silence from our political masters but there is the odd rumbling from some ministers giving small indications that even worse is just about to befall us.

Sterling decided to have one of its worse days yesterday and the weakness is not over just yet with Cable currently probing the lows of yesterday's sessions at 1.4470. There is minor support here and it must be emphasised that we are still 10 cents above the lows of just a few weeks ago. We are now faced with the fear that the recent two week rally in the Pound has been merely a 'dead cat' bounce and the crosses might start to probe the lows once again. While this is not a difficult scenario to foresee it must be also pointed out that the stresses and strains in the other economies are also starting to impact the attractions for their various currencies. While S&P has downgraded some of the Euro States in recent months it is still a leap of faith to believe that the political resolve pushing the EC project will allow key member states such as Spain, Italy and (to a lesser extent) Greece, Ireland and Portugal to default on their debt. The political pressure to engineer some form of currency devaluation may well win out over the ECB in the longer run. The same might be said for Japan where the strength of the Yen is causing chaos in the manufacturing sector and the US (as has been already commented) is just about to spend some mindboggling sums effectively devaluing existing Greenbacks.

Gold markets must have been reading this comment yesterday as the break of the 897 resistance lead to an immediate rally. Our punters rode the move all the way up and by the close were sitting pretty with prices fully 21 dollars up on the day at $916. This morning's opening level is almost prosaic with no follow through from the Far East but there is the feeling that the rally had more to do with weakness elsewhere rather than any fundamental shift in the attraction for the Yellow Metal. Fears for valuations in equities and bond markets will drive buyers into Gold. If the indices continue to fall then the price will probably continue to rally and vice versa.