This time last year I was forced to give up food and alcohol in an attempt to combat the effects of having cornered the markets in mulled wine and mince pies. Fortunately this year I am somewhat healthier and I have returned from Mallorca without having been dragged back into the water by Greenpeace and therefore my fasting will be somewhat limited.
Over the holidays the market trends have continued. the dollar has weakened and equities and gold have continued to surge much to the consternation of those Elliot wavists who are no doubt recounting as we speak.
For the last two years we have put out predictions for the year and spookily been spot on. Last year we called for a move down to 3440 in the FTSE followed by a rally to 4550. I say spookily because I am not a great fan of having set predictions for a whole trading year as it is important to remain flexible. So what about this year then? Our detailed views will be sent to members this week but here are some of my thoughts:
The market consensus is for an equity market rise of roughly 10% but in an industry that relies on a rising stock market for their profits this is hardly surprising. One thing that we can be sure of is that we will not just have an incrementally rising stock market. With a US presidential election, geo political uncertainties and the fuel of a massive derivatives market we will see good volatility.Last year the FTSE traded between 3277 and 4500, the year before between 3609 and 5362 so a trading range of 1300 would be quite possible. The market consensus for the FTSE at the end of the year is 4825 so the question is will we surprise to the upside, possible to 5500, or to the downside. We could quite conceivably see both with the outcome of the presidential election causing a sell-off.
The movement of the dollar will be interesting and I can't help feeling that we will see a good bear market rally, especially if the equity market continues to rise. I know this is against the trend but when taxi drivers start talking to you about the weak dollar a rebound can't be too far away. Also we should not forget the Homeland Investment Act which is currently with the House Ways and Means Committee. If this is passed it will lead to some large dollar buying, possibly as much as $400 billion a year; almost enough to wipe out the trade deficit. Over the coming months we will continue to keep members informed about this crucial piece of legislation which the rest of the market and the financial press continues to ignore at their peril.
With so many people attempting to end bad habits with a stream of new years resolutions it is nice to see that Commerzbank refuse to be a slave to fashion. Yesterday their senior economist came onto the television saying how the strength of the pound against the dollar would have a dampening effect on inflation in the UK, thus helping the Bank of England keep rates low. One might expect a European bank to actually know that the UK conducts three times the amount of trade with the eurozone than it does with the US and that the pound has been weakening against the Euro. I am sure that the BOE know that the pound has actually fallen 4% on a trade weighted basis over the last year and will therefore ignore the ramblings of a financial institution that continues to set low targets and fails to achieve them.
Harry
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