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Is the cold snap about to end?

Feb 16, 2012 at 12:55 pm in Market Commentary by City Insider

Is the cold snap about to end? My friends in the City certainly think things are warming up.

The January PMI surveys suggested a strong start to 2011 for the private sector with expansion in the services, manufacturing and construction sectors. Inflation is falling and economists tell me it is expected to fall even more sharply as the months go on, providing some relief for the Bank of England, which has repeatedly overshot its 2pc target.

They also tell me the Bank’s latest £50bn round of quantitative easing should support low UK gilt yields for some time to come, much to the satisfaction of George Osborne. Moody’s decision to put the UK’s highly valued AAA rating on negative watch was a blow for the Chancellor, but traders tell me that markets largely shrugged off the news and moved on.

US data has also been largely positive and there is still time for the eurozone to resolve the latest Greek problem ahead of a crucial debt repayment deadline in March.

However, I wouldn’t get too excited just yet. Unemployment is expected to continue rising throughout the year, creeping ever-closer to the 3m mark in the UK. There is also no guarantee that positive survey data will translate into growth when official GDP numbers are published. Much will depend on that March 20 deadline passing without crisis.

Earlier this week I had a number of interesting chats with some investment bankers out in Singapore. They were telling me there was near “panic selling” of sterling in Asia on the Friday before the Bank unveiled the latest round of QE. It appears that they only cottoned on to the fact it was happening at the last minute – such is the nature of a globalised world with information overload. I’m not convinced that sterling has much further to fall however – especially if the stimulus starts to have an effect.

I’m starting to think that we may have a bit of retrenchment in gold. Those close to me know I’m not into technical analysis in a large way, although I believe it can offer some pointers. A couple of the chartists to whom I speak frequently have been pouring over the graphs and reckon that the uptrend is broken and there could be falls down to an area of support in the $1670 to $1680 range.

However, it’s platinum group metals that could offer upside. These metals are mainly used in industrial process and catalytic converters in vehicles, yet it’s a matter of supply that is the problem, according to my friends who attended the annual mining shindig in South Africa last week.

A staggering 80pc of the world’s platinum is found in South Africa and government safety stoppages are driving mining companies to distraction. Cynthia Carroll, chief executive of Anglo American, was calling for more targeted closure of operations – closing down processes rather than entire mines when accidents occur. Such supply disruptions are bullish for the prices of platinum and palladium.

On the corporate front, I promised I’d mention the banks. Stephen Hester will have the chance to prove just how much he’s worth to RBS when the part-nationalised lender reveals its full-year results on February 23. After a meeting with RBS finance director Bruce Van Saun, Evolution analyst Ian Gordon reiterated his “buy” on the company. He reckons RBS will post a loss this year but return to profitability in 2012. The same analyst reckons there’s long-term value in Lloyds Banking Group, which reports a day later.

Until next time…

To give our clients a different and uniquely informed perspective on the financial markets, Capital Spreads introduces “The City Insider”, a fortnightly view from a City expert, with a senior network of influential bankers, investors, economists and analysts. The identity of the Insider is anonymous – and a closely guarded secret – in order to allow our expert to express forthright, personal views and to protect the identity of the City figures upon whose opinions the Insider draws.

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