Just standing back for a moment and looking at the markets over the last month, it seems that neither the bulls nor the bears can get an upper hand.
Both camps seem to be citing evidence for their respective stances. For the bulls, the peaking of interest rates later this year combined with a high level of M&A activity is given to support their case. It is also worth saying that, despite a few big companies disappointing on Q4 results, most put in reasonable figures. For the bears the high oil price, geopolitical threats and the inversion of the US yield curve are put forward as evidence for a fall in equities.
My own view is to side with the bears. The oil price is a problem, but until Iran take its production off the market, supply should not be a major problem. That said, I was quite surprised, bearing in mind the weekend events re: Iran, that NYMEX did not make a bid for $70 yesterday. On the subject of oil, it is also worth noting that both Shell's and BP's results have been viewed by the market as disappointing. (Shell fell 1.5% and BP is down 2.6%). I remember posting last year, that the oil companies profits were getting squeezed due to insurance costs of rigs, security costs, more costly exploration to maintain upstream reserves. If these companies go out of favour with the analysts (and I'm not saying they will) the FTSE could shed 10% very rapidly.
The US housing market will be a big factor (possibly the biggest factor) in where the markets are going in the medium term. On average house prices rose 16% last year. That will not be repeated this year. Even if prices were to rise 5% this year, I think we will see a significant pullback in consumption of durable goods and automobiles.
Inflation is definitely not "licked" yet. We saw on friday that there was evidence of wage inflation (wages up 3.3% last year). It may not be a problem yet, but if we throw in high costs of oil and just about every other commodity, it means the FOMC can't take its eye off the ball.
My own expectation is that some sort of exogeneous event will kick the markets out of this tight range. The most obvious example would be strikes against Iran. Even, if that did not happen, and lets say Iran withdrew its oil from the market for, say, a week, then that would be enough to send NYMEX to $85 - 90.
Lastly, we should be asking ourselves, if everything is hunky dory, as the Fed rent - a - gobs want us to believe why is POG at $573?
