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Credit crunch to take its toll for quite some time

Daily View - 23rd July 2008

So...The vote of 'confidence', if it can be described as that, of Dresdner and Morgan's in HBOS might, after all, be rewarded with a profit.

The big bounce from the lows yesterday afternoon was made all the more welcome for its surprise factor and punters are piling into bank stock this morning feeling that (just possibly) the worse is over for the financial sector.

Unfortunately (as Vodafone showed yesterday) the ripple effects of the credit crunch will continue to spread wider and wider and major corporates who reflect the economy as a whole will probably feel the squeeze over the coming months. The Building sector is reliant on a much greater degree to loan liquidity than virtually every other division in the FTSE 350 and, unfortunately, a partial lifting of the never ending gloom over bank viability is not likely to lead to a loosening of purse strings for quite some time.

Reports out over the weekend indicated that, even in the current environment, a significant surplus of businesses (plus 16pc) were looking to hire rather than fire. And whilst jobs are always more difficult to create than destroy (unless you are the government of course) it is of some comfort to see that quite a large slice of the economy was seeing no fall out at all from the current financial woes.

Of course it is not all sweetness and light but it is always wise to remember that the doom and gloom merchants are unlikely to have it all their own way.

The FTSE is opening sharply higher at around the 5420 level having traded as low as 5280 yesterday afternoon. There is strong resistance at the 5430 level which might hold us back in early trading but if the bulls can maintain their momentum then a break through here would put 5520 in the target sights. On the down side there is support between 5370 and 5380 but below here dealers will probably be looking for the low 5300's for further help.

Oil is suddenly in the scenario of being 'Billy No Mates' in the kitchen at parties. It has now retraced 20 dollars from the highs of last week and punters are getting a little burnt in the fall out. Stories of 150 and 200 bucks a barrel (whilst possibly true in the medium term) have tempted buyers out of the woodwork just as the price has dumped lower. September Brent is now down at support at 127.75 and buyers will be hoping that the level will hold. The momentum appears (for the time being) to be in the sellers favour and if this level is broken on a close the next target will be down to 121.

Gold has also had something of a brick wall moment having flirted with the 1000 level early last week when hitting a high of $989. We are now down at 939.4-939.9 and longs will be hoping that this is just a pull back scenario in the current bull move. We moved higher so quickly that there is not much recent volume levels to pinpoint but well below here at 929 would seem to be crucial to maintaining a move higher. If the banking sector is in the process of crawling out of the wreckage then the argument for gold begins to look very weak indeed. In the end Gold is just a pretty, useless, yellow lump of metal. Too valuable to actually use for anything and costly to own. In times of trouble it has safe haven value but in good (or even just slightly bad) times of little worth as a long term investment.

The recent weakness has been dollar related to some extent as the greenback has had something of a bounce in the last few days but the problem for commodities is that they are in high territory for two reasons (weak dollar and supply) if either of these reverses then the fall out could be spectacular.

In the Forex markets the question on everyone's minds is "has the euro peaked". The euro/dollar failed to break the previous high and the charts are now just giving the merest suggestion of a double top formation. With even Germany slipping into a slowdown the chances are that the ECB may be closer to a cut that is expected and they may yet come to regret the hike of last month. Euroland is a swathe of contradictions when we look at the economic situation. Italy is close to bankruptcy, Spain is in the grip of a full scale housing implosion and Ireland is experiencing (for the first time in a generation) the reappearance of population outflows. Only the usual suspects in the North have kept the whole project in line but with the political will running far, far in advance of the public the probability of some form of break up must be included in the risk models of investors.

The Tradefair Spreads Team