Wednesday 2nd July 2008

One Step Forward, Two Steps Back …..

The various Markets started down the road that is the second half of the year with some optimism but got hit by another almighty truck speeding towards them. Equity. Bond, Commodity and Currency Markets all spent the day on the defensive amid widespread wailing and wringing of hands.

Stock Markets are having a torrid time with both the FTSE and Dow just a smidge away from entering respective official bear markets, indicated by a fall of 20% from the previous peak (FTSE is currently down 18.5%). The NIKKEI last night closed after its 10th consecutive day of losses, the longest sequence since 1965 having lost about 8% of its value during this period. This morning sees UK stocks already under pressure with both Construction and Retail sectors under pressure – M&S pontificating that retail conditions will remain grim for the next 2-years.

Dissonance reigns in Europe over the ECB decision on interest rates scheduled for Thursday lunchtime. The Central Bank have manoeuvred themselves into a corner over the decision on raising rates having already primed the Markets for such a move. Politicians however can see the writing on the wall and have been voluble in their questioning the wisdom of such a move. With economic data from Eurozone very much on a down, the hiking of rates is unlikely to go down well across the region.

In the UK, data was also negative with the PMI lower than expected (45.8 ag exp 49.8) to a 7-year low, house prices fell for the 8th straight month declining at their sharpest rate since December 1992 – according to the Nationwide Building Society and Sterling accordingly dipped down to 1.26 against the Euro.

The only currency that fared worse than the pound was the US Dollar which suffered at the hands of a continued rise in crude oil prices (Israeli sabre-rattling towards Iran in response to the latter’s nuclear programme) and the decline in the Global economy. Cable briefly hit 2.00, but very briefly. By the time you had said ‘ I will have some Dollars there please’ it was back down and heading towards 1.99 again.

The quandary for market participants is for everything that you sell, you need something to buy. On that basis the high yield commodity based currencies might have some latent strength in them and I particularly like the prospects for the Norwegian Krone with oil reserves, independence and relatively high interest rates. We will see.

Today’s UK CIPS construction PMI numbers at 9.30 are unlikely to inspire and we are left awaiting the US Factory Orders at 3.00pm to give us something to work on. After the better than expected US manufacturing figures yesterday afternoon (the one beacon of light in a gloomy economic world), we would like another good number to promote the view of a US economy perhaps bottoming out. If this is the case, then expect both cable and Euro to decline later in the day. This, allied to the EU’s Almunia’s comments this morning that the Euro was overvalued should ensure that the 1.5850 support for the Dollar remains largely intact.

Back