The World Economic Forum met over this weekend to discuss the imperative decisions ahead in order to ensure that growth on the world economic stage is the heart of any policy maker's agenda. However there is little they can realistically do about the continuing price fluctuations at the behest of unrest in Egypt and the Middle East and strong continued growth across Asia as a whole.
Despite encouraging economic figures from the UK, US and Europe over the past week, price hikes and inflation remain a bitter aftertaste in the mouths of policy makers who are taking action in accordance with fighting deficits. The UK has shown steady mortgage rate approvals and home sales in the US have improved beyond expectation over this past week, which is usually a good indication of growth; even if sluggish. However US unemployment figures have increased, the US Advance GDP came in lower than expected and the UK GfK consumer confidence, a closely watched indicator of the UK, took a sharp hit; much more than expected as the VAT increase came into effect.
Overall, the economies are showing slow progress in recovery. The danger of course being that if prices continue to rise, the UK and US are in for a very choppy ride as interest rates, which is usually the default regulator of the economy and main weapon in combating inflation, are defunct in the present state of affairs.
This is for two reasons; firstly they are at the minimum level in the UK, US and Europe in which case the only change to make in any one of the three regions is to increase it. Doing so could hamper growth and lending which is needed for business and mortgage owners to continue making payments and remain productive in the economy. The second reason is that although raising the interest rates is a profound way of curbing a heating economy, it has no effect when the heat is coming from external factors. Raising interest rates in the UK for example, will have no impact on the demand from China and India and the extensive amount of raw materials they consume as their economies grow; or of course the situation in Egypt and the Middle East.
Egypt unrest and the threat imposed
As the markets try to play themselves out, the continued unrest in Egypt will have huge implications on world commodity prices, which will in turn impact heavily on the UK and US. Egypt is seen as a keystone in the region despite being a relatively small producer of oil in comparison with its peers in the Middle East. Due to the supply chain in which oil is transported through the Suez Canal, if the unrest has an impact on this key gateway point connecting to the Middle East, then the costs of transporting the oil will rise substantially and hence the cost of oil will rise.
De-stabilisation in the region and civil unrest spreading is also cause for great concern as the supply and demand effect will cause oil prices to rise, especially if spread to countries like Saudi Arabia. Last week saw a spike in prices with the price ending at $89.38 per barrel. If the situation continues towards the government being toppled without the transition being initiated by President Hosni Mubarak, then extremists may fill the void being left, in which case the danger becomes very real.
Oil price may see key resistance points being targeted by traders; however these fundamentals factors may see more emotional responses to buying and selling over the week.
If the price continues to spike then $91.10 is a key support and resistance point in which sellers may come in to stall price levels. There may be a slight decline in price and if so, the key level to watch for buyers coming in at would be $88.54. If significant support is found at this level then $91.10 would indeed be the key level to watch. If at this price no major selling takes place then we could see $92.54 as a benchmark for selling.
If this level does not hold as resistance, but see buyers continue to enter the market, then $95.16 will be a significant level to target next.
However given the fact that most of the trading taken place over the last week has been based on speculation and in response to the news, the price could decline. Short targets for bears are at $88.54, $87.33 and $86.35; key support and resistance levels.
Last week also saw heavy buying in the US dollar, US treasuries and Gold as Managers take their capital out of riskier assets and put them into traditional safe havens. Major index's all took a hit last week with the FTSE, S&P and the NASDAQ all closing with sharp sell offs on Friday.
Over the last two weeks Gold has seen support levels at both £1332.59 and $1319.39 before buying sent the price sharply toward the $1353.3 level; however this level could not be broken as resistance which is not surprising as it has previously held as such a strong support level.
Should Gold fail to see strong buying pressure then $1332.64, $1319.39 and $1299.56 are key support levels to look for to the downside. Bullish targets are likely to be at $1352.56. If this breaks and finds support at this level, then $1386.08 is the next key level for long targets.
The next quarter will have determining factors that weigh in on the decision to raise interest rates. Now that the VAT implementation has been put into effect in the UK, consumer prices should stabilise for a period of time while people get used to increased costs. Oil price tends to have a quicker impact on prices as filling stations react more quickly to price fluctuations which impact on consumers heavily. Consumer goods may take a little longer as the price is passed on more slowly down the supply chain, but not much longer.
The key will be to have Egypt stabilised as soon as possible in which case half the battle will be won, however this will not solve long term rising inflation problem as a whole. To get ready for that battle, there needs to be job growth and increased safe lending to continue for business and home owners to grow the economy. Then price fluctuations would be minimised and interest rate levels may become an effective tool against inflation again. If 2010 was a year for speculation, 2011 could certainly be shaping up to be the year in which speculation turns to reality.