Will the latest cash injection get things moving?

Daily Financial Analysis / Simon Denham / 19 January 2009 / Leave a comment

Daily View - Monday 19th January

Markets have opened to the up side over the weekend news of even more state intervention in the banking system in an attempt to influence the money markets.

Time will tell as to whether this additional combination of injection and guarantee will finally get things moving but it must be admitted that merely making money available does not appear to be the real problem. Consumers are in danger of becoming an endangered species as fear stalks the workplace every time a senior manager walks in. Unemployment lines are growing and it would be a foolish family which did not put down as much cash as possible in case of the worst occurring.

In light of this the concentration of ministers in "trying to get the banks to lend more" (!!??) may appear, on the face of it, to be slightly misplaced. And it is here that we start to argue about the chicken and the egg. Do we need to loosen up lending before the economy turns around (risking ever more debt in a deteriorating credit environment) or do we wait for the 'green shoots' before increasing lending (risking a downward spiral of ever lower economic activity).

Unfortunately we live in a particularly weak democratic environment where politicians will do almost anything to achieve a 'quick fix'. Recessions are tough and will always be tough and the current administrations' ever increasing monetary injections over the last 11 years have meant that the dismal days have been put back time and again, sacrificing the future on the alter of the next election. I fear that the struggles of the Government to avoid the worst will take the banks down with them. If companies are in dire enough straits now to require more funds then what on earth will their position be like in a years time? In times past the banks effectively did the nations work for them by weeding out the weak leaving the economy better placed for the next up swing. This time there appears to be a denial of the theory of survival of the fittest and the longer this goes on the worse the final outcome may become.

Dealing has been fast and furious this morning with the bulls and bears fighting it out for supremacy. As I write the bulls 'have it' with the FTSE up around 80 points at 4225 but it would be a brave investor who commits too many funds in this market. Support seems to be solid just below 4100 but conversely pressure remains above 4250. Longer term the failure of the recent move higher to break above 4687 (the high of the November rally) may be seen to be very disappointing and with the deteriorating global environment there is a possibility of a renewed attempt (medium term) to challenge the double bottom at around 3700.

Banks received a bit of a boost in early action but the optimism has died away as 'Our Gordon' spoke to journalists. Shareholders are not exactly 'up there' as a high priority for the Government and in the current political environment good banks may be swept up with bad banks as the spectre of total nationalisation gets ever greater. The stock, at these levels, may be worth a punt with money you can afford to just blow away but don't expect any favours from the state.

On the currency markets the pound continues to look weak after the rally of a few weeks ago failed to find any second wind. The Industrial Output numbers last week were truly awful and with the rest of the economy depending on a service sector which is going in ever decreasing circles it is not impossible to see the pound continue ever lower (no matter what the 'true' valuation should be). If the rest of the world does not need what financial services we have left (or the financial centre moves further East) then the outlook for sterling may deteriorate further.

Gold made an abortive attempt at the 800 level a couple of days ago but the pressure exerted by the weakness of most other asset classes told in the end and up we went. At $842 this morning the market is quiet as dealers ponder the chances of an attempt to challenge the 880/90 level (which has proved a tough nut to crack over the past month or so) or the possibility of another attempt to break the short term upward trend line (now at around $815).

Oil is still digesting the huge feb/march expiry spread and dealers will be fearful of the same thing happening towards the end of this months trading period. The expiry of both Jan and Feb showed very weak demand. Will the same thing happen for the March contract?