Daily Financial Analysis / Simon Denham / 20 January 2009 / Leave a comment

Daily Comment Tuesday 20th January

Markets appear to be quite sanguine at the prospect of the demise of much of our banking network but the events of the past few days are unlikely to generate anything other than increasing fear amongst the UK population as to their future prosperity.
Retailers are already struggling with the reduction in consumer demand and given that much (make that 'nearly all') of their merchandise is sourced internationally the weakness of the pound will be squeezing margins even further. With demand likely to contract for another 6 months at least and with credit lines difficult to come by only the best will survive unscathed. Now, with the news programmes are filled with ever increasing doom, it is not a great leap of imagination to forecast that the high street may get even worse.

Anecdotally I can certainly see a falling in demand with restaurants and pubs around my house eerily quiet. Even the commuter trains seem to be significantly less packed (I no longer have to trample old ladies and small children to get a seat!).

The year end rally now seems to be a distant memory (all of two weeks ago today the FTSE was 15pc higher at 4680) and while the majority of the falls in the index have been bank related this commentator finds it difficult to believe that where the banks go then many other stocks will not follow. Yesterday saw an initial rally to 4250 as investors hoped for some safety from the new State bail out package but once 'Our Gordon' actually started to speak it became obvious that shareholders were the least of this government's worries. Hard as it is to digest but in the very long run they are probably correct but in a capitalist dominated democracy the destruction of investment savings over the last year or so will probably take a decade to replace. Pensions will give pitiful returns this year affecting long term plans and necessitating longer working life spans. This may also have implications for increased long term social security aid to newly impoverished near retirees.

In my comment yesterday I focussed on the resistance to a move above 4250 and the support below 4100 this pretty neatly summed up the eventual trading range for the session with the high at 4252 and the eventual close just above 4100 after an attempt to force the market even lower. The call this morning is for the markets to open slightly weaker at bang on 4100 but while the entire UK economic situation seems to be pretty dire it must be remembered that some 70pc of the FTSE 100 revenue is made overseas. With the pound deteriorating this may mean that profit margins on foreign earnings get a significant boost and the value of UK stocks in euro and dollar terms start to look ever more attractive. The current bear move probably has more to do but if even a modicum of optimism returns the markets may well move sharply higher very quickly.

Sterling is now back at the grim levels of the year end with the Cable rate plumbing a new low in early action this morning. The cross is now at 1.4140, 750 pips off the highs of yesterday! Readers of this comment will know that we have been consistently wary of the pound for over a year and the accelerating destruction of value is not exactly confidence inspiring. Huge public debt, massive trade deficits AND very low interest rates are not likely to attract investors to our shores. It is likely that the Gilt markets will take a heavy pounding at some point in the medium term as the potential for further rate cuts winds down and the counter pressure off excessive issuance combined with credit worthiness fears (even the UK could lose it's AAA rating) act to deter buyers.

I am sorry to have to say that the UK appears to be entering a 'perfect storm' where virtually every asset class begins to lose value in local terms. Already the average UK citizen is some 35pc poorer in world terms than they were at the end of 2007. This is a massive hit to the collective wealth of the nation and not something that can be easily reversed.

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