24^thJanuary 2011

Equity Index

Overview

Last week the US equities lost ground for the first time in 2011 as fears of the Chinese economy overheating gripped the market. This week traders have a lot to get their teeth into; we will see the releases of the latest GDP numbers in the UK and US as well as the FOMC Rate decision. In addition earnings season continues with many US firms including Microsoft and Caterpillar releasing figures.

Thoughts from the trading floor

From a technical perspective the S&P 500 continues to look strong, however at current they are struggling to hold above support at 1277.00. A failure to hold above 1277.00 could see the market fall back to 1245.50 with further support found at 1216.00.

In the last few weeks we have seen Trichet warn of short term inflation risks at the latest ECB press conference whilst UK inflation continues to rise to worrying levels. This poses the central banks with a serious dilemma, it is clear that the main drivers in the recent inflation rise are commodity and Oil prices; not overheating domestic economies. In such instances we can consider that the inflation is being imported and rate rises will simply sacrifice domestic growth to the benefit of countries currently better positioned. However the central banks mandate stipulates that they must control inflation, to do so their main tool is interest rates. Rate changes are a crude tool which fail to provide the subtlety central bankers crave but at this stage they find themselves with few options.

If inflation continues to rise particularly in the UK we may see the BOE forced into a rate move they struggle to justify from a macro growth perspective but they deem necessary to stave off price rises. This would have a serious negative impact on any recovery as it would put overwhelming pressure on mortgage and credit markets placing substantial downward pressure on house prices and spending levels. This would undoubtedly have a large negative impact on equities as future growth levels would be revised much lower. The main way that such a scenario may be avoided is if we see a drop off in world commodity prices, the most likely catalyst for this being a slowing in the Chinese economy. This could either come about naturally or more likely through aggressive tightening in monetary policy. In either scenario world equity markets would take a nose dive as so much current world growth levels are associated with China. Considering all of this any further signs of inflation in the UK or Europe may be the signal that the current bull market is reaching its peak.

Important events this week.

• Tuesday: GDP (Advanced) (UK), Consumer Confidence (US)
• Wednesday: New Homes Sales (US), FOMC Rate Decision
• Thursday: Durable Goods Orders (US)
• Friday: GDP (Advanced) (US)

Bull View

Bulls will now be targeting resistance at 1313.50 hopefully aided by strong data releases this week. Their main concern will now be profit taking as investors look to realise profits after 18 months of strong performance.

Bear View

Bears will desperate to see the S&P drop below 1277.00 opening the door for a break lower. Continued inflation fears could support their cause.

Futex View

We believe that the current bullish trend in equities is coming to an end and a pullback is around the corner. When it finally arrives it will likely be aggressive; further European sovereign concerns may provide the catalyst for the move.

Focus on Oil

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22^nd January 2010

Macro-Commodity Overview

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7^th January 2010

Macro Overview

A House Price bubble in China?

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