Interestingly, technical analysts don’t tend to use half-yearly charts. Daily, weekly and monthly bar or candlestick charts are the most common currency, hourly, quarterly and annual charts for the keen. This contrasts with fund managers who favour taking stock at six-monthly intervals, presumably to extrapolate potential annual performance. This same thinking underpins most economic forecasts where the recent past is assumed to continue ad nauseam.
So today The Trader looks at four key elements of the UK financial system to see what might be around in the second half of this calendar year – and, as always, we remind that all views are based purely on technical analysis.
At the heart of everything is the availability and cost of credit. Reserve requirements at commercial banks plus the central bank’s key target rate are used to nudge interest rates to try and get to the right interest rate level for the economy. ‘Try’ and ‘nudge’ being the operative words because if demand, credit worthiness, or optimism are absent, as they say: you can lead a horse to water but you cannot make it drink. Conversely, if you look skint, they won’t lend.
The bond market is a far better gauge of the cost of capital, sovereign debt being the starting point with buffers built over and above these rates depending on who’s doing the borrowing. Despite constant predictions that UK interest rates must rise – so that the elite can pretend that everything’s fixed and back to normal – two-year gilt yields have remained below 1 per cent since the great financial crisis of 2008. This is not normal; this is an emergency, crisis-style rate of return.
Thirty-year gilts yield a mere 1 per cent over two-year ones – seriously low, whatever spin you want to put on it. In fact, the secular trend to lower rates remains totally intact at the long end of the curve. What is surprising is that US 30-year Treasury bonds yield a whopping 160 basis points over long gilts, the highest spread since the record high of 1984 (220 basis points), and one standard deviation above the ultra-long term mean. This matters, because American mortgage rates are based on this.
Sterling has been tricky, cable strengthening post-referendum and post-Trump’s election, only to give back painfully slow gains in the latest quarter. On the Bank of England’ trade-weighted basis it’s still perilously close to the record low reached in 2008 and again in 2016. It’s cheap by historical standards, but then the pound has been a notoriously poor store of value over the last century. With a bit of luck, it should gain fractionally – if not this year then maybe next year.
Looking at the FT All-Share index (to make a change from our daily coverage of the FTSE 100), like other indices in this stable it recently stalled at the record high. No longer overbought, bullish momentum has disappeared over the last year and some oscillators have started turning down. Like the top 100 shares, it’s possibly forming a broadening top chart pattern. Not complete, not exactly clear cut, but sending out a few small warning signals that all might be not quite what one would hope. We urge readers to work out a clear strategy as to what action they might take if shares drop by x, y or z percentage points.
