The Pre-Budget report yesterday did nothing to address the budget deficit and the Chancellor actually raised public borrowing forecasts by £5bn over the next four years. He maintained his GDP forecast of 1.25% for 2010 and 3.5% for 2011 and 2012. The fact that his forecast for 2009 was way off the mark received little attention with his forecast reduced to -4.75% from -3.5%.


The announcement of a temporary windfall tax of 50% on bonuses in excess of £25000 for bankers had been widely anticipated. There was little in the way of measures to boost economic activity within the report with more help for low income families but with an imminent hike in the VAT rate back to 17.5% combined with the new 50% tax rate for high income earners it is difficult to see any real benefit to consumption.

All difficult decisions on spending cuts and tax increases have unsurprisingly been deferred until after the next election. The forecasted time line for getting the budget deficit under control is now longer than previously stated and it will be reduced at a slower rate. This may well have implications for the UK’s credit rating and the uncertainty over a possible downgrade could well place further pressure on sterling and with the anticipated heavy gilt issuance this may well push gilt yields higher.

During recent days we have had some soft economic data and the reported decline in German Industrial production during October is a case in point. A fall of 1.8% compared to expectations of a 1% increase does demonstrate that the economic recovery is far from certain and we may well see a lower GDP growth rate during Q4 for Germany compared to Q3. This of course raises a question mark over the rate of growth we are likely to see during 2010. It should be borne in mind that these figures can be subject to volatility but the change in trend so soon is a little worrying.

There was a similar picture for the UK with stagnant industrial production during October against expectations of a 0.5% increase.

In Japan it was interesting to see the extent of the Q3 GDP downgrade which fell from an initial estimate of 4.8% to just 1.3%.

For clients we have updated our note on Sainsbury which you can access via your research login.

During recent days we have had some soft economic data and the reported decline in German Industrial production during October is a case in point. A fall of 1.8% compared to expectations of a 1% increase does demonstrate that the economic recovery is far from certain and we may well see a lower GDP growth rate during Q4 for Germany compared to Q3. This of course raises a question mark over the rate of growth we are likely to see during 2010. It should be borne in mind that these figures can be subject to volatility but the change in trend so soon is a little worrying.


There was a similar picture for the UK with stagnant industrial production during October against expectations of a 0.5% increase.

In Japan it was interested to see the extent of the Q3 GDP downgrade which fell from an initial estimate of 4.8% to just 1.3%

Today we have the all important pre-budget report.

We have closed out today a profitable trade in Reed Elsevier with a view to buying it back if the opportunity arises. The market looks as if it is losing momentum at the moment and it is very possible that a Dow sell off will bring the market back and the Reed share price back below £4.70.

The US unemployment data for November published on Friday did provide the market with a pleasant surprise. The decline of only 11,000 in payroll numbers with a fall in unemployment to 10% from 10.2% compared to forecasts ranging from a decline of 100,000 to 150,000 with the unemployment rate expected to remain static at best. The improvement in the trend certainly demonstrates that the US recovery is gaining momentum. We should see the number turn positive in early 2010 especially once recruitment gets under way for the decennial census count. The data also included a revison to the previous two months figures with the declines being revised down by 159,000. We have been asked whether the data for last month is simply a one off improvement but on the face of it the data looks solid and it does suggest an improvement in the employment outlook. Companies have been rigorous in cutting staff costs for some time now and this change in trend is consistent with the recovery in output that is ongoing.


In the US consumer credit data for October will be released today and Ben Bernanke is due to comment on economic conditions later today. In Europe, Germany will be releasing factory order data for October.

Both sets of ISM data in the US this week have been disappointing although they still indicate that the recovery is ongoing. The Non Manufacturing ISM fell back below the key level of 50 to 48.7, with anything above 50 generally indicating expansion. However, the new orders element of the composite index remained relatively buoyant at 55.1 which suggests that the momentum is being maintained. Overall though the fact that the composite index has fallen back below 50 so soon is a reason for worry and certainly any further deterioration may well mean the economic recovery is losing momentum far sooner than many were expecting.


The second estimate of Eurozone Q3 growth confirmed that the economic recovery is ongoing in Europe. The estimate of 0.4% is unrevised from the preliminary estimate. Most of the gain was due to inventory replacement with consumer spending down 0.2% over Q3. Exports over Q3 increased by 2.9% although this was almost matched by imports which increased by 2.6%. The real concern remains consumer expenditure which will have to take up the slack during 2010 if the recovery is to maintain its momentum. Retail sales in the Eurozone for October were unchanged on the previous month against expectations of a modest improvement.

This week we also had the publication of the Beige book in the US which basically compiles anecdotal reports at the regional Fed banks. The message was one of slight improvement with 8 of the 12 districts noting a modest improvement in activity whilst the remaining 4 reported little change.

The panic over Dubai has now abated and already looks to be old news. The market is close to posting new highs for the year and as we move closer to the quiet holiday season we can see the potential for a gentle rally to the year end. After that we expect conditions to become difficult and it is not impossible that the year will start badly as profits are locked in and renewed uncertainty over the strength of economic recovery may well put markets under pressure.

All eyes are on the Non Farm Payrolls in the US this afternoon. The consensus expects a decline of 100,000.

The US Non Manufacturing ISM data for November was disappointing with a decline back below the key level of 50 to 48.7 against consensus expectations of an improvement to 52.0 from the previous month's level of 50.6. The market has sold off a little but we have not seen an adverse reaction to the number probably because the new orders constituent remained strong at 55.1. The employment element fell to a disappointing 41.6 and this remains a major area of concern if we are going to have a jobless recovery.

The ISM Manufacturing Index data registered a sharper fall than what many were expecting with a decline to 53.6 in November from the previous level of 55.7 in November. The key issue is that the index remains above the 50 level and growth within the US manufacturing sector is continuing. It would appear that the US economy is still on course to post a level of growth for Q4 similar to that in Q3.


The ADP employment data in the US for private payrolls was broadly as expected with a further decline of 169,000 in the payroll numbers for November. The Non Farm Payrolls on Friday are likely to show a similar decline although expectations stand closer to a fall of 100,000.

A Morgan Stanley note has been doing the rounds during the last few days and they seem quite bearish on the outlook for 2010 primarily because of the likely impact on expectations for 2011 as the stimulus measures are withdrawn during the coming months. It is difficult to disagree and if you look back historically at how equity markets respond to periods of monetary tightening a prolonged period of underperformance can occur. As to when this happens is a matter for debate, but undoubtely during 2010 we are going to have some very volatile periods and the gains we have made during 2009 are going to be a lot harder to replicate.

The shakeout from Dubai last week had upset a number of stocks which have fallen back below support lines and despite their strong fundamentals it does make life more difficult in finding appropriate entry and exit prices. We have closed out a position in Imperial Tobacco today at a modest loss simply because it fell back heavily last Thursday with the rest of the market and we must now see how the price moves in the very short term before attempting to trade it again. The shares are up strongly today along with the market and in all likelihood they will continue to rally if the market continues to make up the lost ground. However from a trading perspective it is sometimes more prudent to close out and watch how the trading range develops before trading the stock again.

As we are now into the last trading weeks of the year it will be interesting to see if the market ends on a high which I suspect it will. However I do think January will again be the start of a volatile trading period and I would not be surprised to see the market sell off once again as we enter 2010.

The situation in Dubai looks set to dominate the headlines and drive markets lower today. This story is going to take a while to unfold and is unlikely to go away in the very short term leaving markets fragile at best. However, the overall impact on the world economic recovery is unlikely to be significant. The UK banks exposed to this area are unlikely to face anything more than increased provisions at this stage with the possibility of further capital raising to offset the impact of Dubai looking highly unlikely. The coming week may well prove to be very volatile for the market as further information comes to light on what support Dubai is going to receive.


This is a big week for economic data in the US. We start tomorrow with the ISM Manufacturing Index for November. Having risen 3 points to 55.7 in October a degree of consolidation is expected with the consensus looking for a modest drop back to 55, a level still consistent with a strong recovery in the manufacturing sector. Thursday brings the ISM Non Manufacturing Index which last month proved to be disappointing with a modest fall to 50.6. For November the consensus is expecting an improvement to 52.0, which would continue to indicate growth. A drop below 50 is unlikely but if the index has fallen back we can expect to see negative reaction from the market. Finally we come to the big data of the week with the publication of the non farm payrolls on Friday. During October non farm payroll employment decreased by 190,000 and this month the pace of decline is expected to fall to 100,000. Based on the weekly initial jobless claims and improvement in the trend does seem likely. From January 2010 the employment numbers are expected to receive a temporary boost from the decennial population count in the US. The US has already begun employing people for the census but the majority of the expected 1.4m workers that will be needed will be taken on during the first half of 2010, but they will come back off the payroll numbers during the second half.

In Europe this week we get PMI Manufacturing data for Europe and the UK which is due out on Tuesday and the equivalent data for services on Thursday. Also on Tuesday we get Eurozone unemployment which is expected to tick higher and on Thursday the preliminary estimate for Q3 Eurozone GDP growth which should confirm that the Eurozone has moved out of recession. On Thursday Eurozone retail sales for October will be published.

The situation yesterday with Dubai and the UAE brought back some fears that seemed to have almost disappeared from the market. The timing was not helped by the failure of the UK exchange leaving the market to worry over the impact of this announcement and after trading returned the ensuing 3% decline brought back unwelcome memories from earlier in the year. The fact that Dubai's holding company has announced a six month standstill on debt repayment is unwelcome news and left analysts scurrying around trying to establish the exact levels of UK banks exposure. The total debts of Dubai are estimated at around the $90bn mark and the UK banks are all likely to have some exposure. HSBC, Barclays and RBS seem to be the primary holders at present, but none from what we have seen have exposures that could result in a real problem. Whether any of this debt will be written off remains to be seen and it will be a long time before a clear picture emerges. This story will impact on sentiment in the very short term but overall the impact on the world economic recovery is insignificant. The market may well find itself hitting a new high before the year is out. Nevertheless a correction of some form is not unhealthy at this stage and we think valuations in some sectors have got ahead of themselves.

News announcments such as what we had yesterday just cannot be predicted and it serves as a useful reminder that with CFD trading you have to adopt some sensible measures to ensure you are not overly exposed to a big points fall. Sensible gearing is a must as are stop losses. For the former we generally do not recommend using much gearing on individual positions but instead leave the gearing so that you can hold more than one position if required. With stop losses most brokers will advocate a 3% stop. We generally use a larger stop to avoid being stopped out on a day such as yesterday when there is a real risk of being stopped out only to see the stock in question rebound after so much volatility. Clearly this may not always work, but overall if you are happy with the fundamentals of a company sometimes it can be better to accept a slightly higher running loss until the valuation returns to where you expect it to be.

The minutes of the latest FOMC meeting published yesterday did not present any surprises although there does appear to be growing concern amongst some members that the current policy is storing up problems for the future which was clear from the statement ." In addition, some participants feared that the risks to inflation were already tilted toward the upside "because of the possibility that inflation expectations could rise as a result of the public's concerns about extraordinary monetary policy stimulus and large federal budget deficits." Whilst this view among some members is unlikely to result in any change in policy stance near term it could well mean that we will soon start to see at least a change in the tone of future statements as the FOMC starts to forewarn the market of a possible change in policy stance concerning the current stimulus measures.


Today we have seen a slight revision to Q3 UK GDP growth from -0.4% to -0.3% which will disappoint some quarters where the view was that the initial estimate was likely to be subject to a substantial upwards revision.

We are holding fire on our next trade with the market where it is. Ideally we would like to see a 1% down day on the FTSE100. We have stocks in buying range but sometimes it is better to await better conditions in the broader market before entering into a trade. Sometimes this can pay off and sometimes it will go against you but with the FTSE100 at 5350 and up 30 points on the day and with the Dow closed tomorrow I cannot see the market making any significant move until Friday.

The Purchasing Managers Index data for Europe yesterday demonstrates that Europe continues to move into recovery mode. The composite PMI data for November was 53.7 compared to 53.0 for October. Both the manufacturing and service sector components rose pointing to an improved GDP figure for Q4. The service sector PMI rose to 53.2 a little higher than expectations and a figure that suggests activity is at its highest level for 2 years. At the same time both France and Germany released their PMI data which reflected the overall improvement in Europe with both countries leading the Euro Zone out of recession.


The US existing home sales data for October increased by more than 10% month on month to an annualised rate of 6.1m units against expectations of a rise to an annualised rate of 5.7m units. A good deal of the current activity in the housing market is down to tax incentives with the October expiry of first-time buyer credits likely to have pushed sales ahead, but with the prospect of new incentives carrying on into 2010 we should at least see stability in the US housing market. The level of housing stock supply has fallen to seven months from 8 months. Given that this figure was pushing 11 months supply in the second quarter of 2008 we are now moving closer to a supply level that is consistent with a more stable market.

Today we get the second stab at the estimate for Q3 US GDP. Expectations are for this to be reduced from the initial estimate of 3.5% to 2.8% although we are aware that some brokers are looking for a number even lower than this. A big miss is unlikely but if it does happen we can expect some volatility in the market. Also this afternoon we get the Conference Board consumer confidence data for November. After a big drop in October to 47.7, the market is expecting some stability with a further modest fall to 47.0, with increasing unemployment likely to play a big part in keeping the index down.

The market has opened well this morning with the FTSE100 up almost 90 points at the time of writing. There is no real catalyst for this apart from a weak period of trading towards the end of last week which has resulted in some buying this morning and the usual headlines over an optimist outlook for next year. We are still cautiously optimistic but expect trading to be choppy over the coming weeks with plenty of headwinds to be faced as we move into 2010.


Today we have no major economic data with just US existing home sales data this afternoon which according to the consensus is expected to move up to an annualised rate of 5.7m for October from the 5.57m reported for September.

In Europe we have already had the Purchasing Managers Index data for November which rose to 53.2, up from 52.6. Most of the economic data for Europe points to a continuing economic recovery albeit at a sub trend rate.

We have closed out another Imperial Tobacco trade at a profit having bought in again last Thursday.

The MPC meeting minutes this week provided few surprises. David Miles votes for a bigger extension to the quantitative easing programme with the suggestion of a further £40bn rather the £25bn which was agreed upon. Conversely to that Spencer Dale voted against an extension of quantitative easing on the basis that it will fuel excessive asset price increases. Further discussion included the possibility of cutting the interest rate on a percentage of commercial bank reserves.

The UK's fiscal deficit is ballooning at a fast rate of knots. The deficit for October was a staggering £11.4bn far above what just about everyone was estimating. The total deficit so far this year of £86.9bn is above that for the whole of 2008. With tax receipts continuing to fall the situation will deteriorate further over the coming months.

This week we closed out our holding in Reed Elsevier and we traded Imperial Tobacco yesterday successfully.

The CPI data yesterday in the UK demonstrated that inflation is likely to gain momentum over the near term. The headline annualised rate increased to 1.5% from 1.1% which was a little higher than the consensus expectation which stood at 1.4%. The figure was higher than expected due to the impact of food inflation. With the prospect of vat returning to 17.5% and with the energy price comparatives starting to fade as we start to lose the comparable lower energy prices of last year we will see inflation moving higher with the prospect of it moving above target. However, it still seems likely that over the medium term the impact of so much spare capacity in the economy will keep prices relatively low. Nevertheless a return to inflation above 2% is likely to worry the market.


In the US today the housing start data for October was very bad with an 11% decline to 529000 compared to consensus expectations of a modest increase to 600,000 from the previous level of 590,000. If nothing else this demonstrates how fragile a lot of the data is at present and clearly a lot of the government incentives have helped this market. With rising job losses the outlook for the US housing market remains uncertain.

The CPI data in the US today for October came in at 0.3% for October which compared to the consensus figure of 0.2%.

Our new note on Scottish and Southern Energy is now available for clients via their research access.