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Market Update 6th May 2010

Gilts, the election and the Euro zone

The Macro Trader’s view:

Today the UK votes in the closest fought General election campaign in living memory. With a
hung Parliament still looking the most likely outcome, at least according to the opinion polls, we
look at how the Gilt might react once the results are known.

We judge there are three possible scenarios:

1. The Conservative party wins an overall majority.
2. The Conservative party is the largest party, but needs the support of the Ulster
Unionist to achieve a working majority, and
3. The Conservatives or Labour emerge as the largest party, but need the support of the
Liberal democrats to secure a working majority.

Under Scenario 1 we judge the Conservative party would indeed cut the deficit more
aggressively than current Government plans. Their main focus would be public spending cuts.
This would have two economic affects; the recovery could initially weaken before speeding up
later, and the Bank of England would leave interest rates on hold throughout the year as they
would expect inflation to correct lower. This scenario would be the most bullish for the Gilt.
Since it would only be adding to the existing bullish impact of the Gilt’s safe haven status
resulting from the Greek debt crisis.

Under Scenario 2, we still judge the Conservative party would seek to cut the deficit faster than
under current government plans and the implications for the Gilt and interest rates are
eventually the same, but there could be a short-term loss of confidence if negotiations to either
form an official coalition or a looser agreement take time to conclude.

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believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
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Under 3, we judge the outlook for the Gilt to be negative. The price for securing a coalition
agreement would be policy set at the lowest common denominator, which is effectively the
current government’s deficit reduction projection.

The markets are unimpressed with these plans, so too are the rating agencies and so too is
the EU Commission. With the budget deficit to GDP around 12-13% and debt to GDP
projected to rise to between 70 – 80%, the UK would probably lose its AAA credit rating. The
increased interest rate burden would make the deficit worse, the Gilt and Pound would come
under pressure and the Bank of England would judge that interest rates needed to rise sooner
than they had previously assumed.
In short, UK public finances are in a mess. The markets and credit rating agencies are holding
fire to see who wins the election; hoping for a Conservative victory. If it doesn’t come, note well
what has been going on inside the Euro zone. The Gilt has benefited over the last few weeks
because the UK is outside of the Euro zone, but unrevised deficit reduction plans would cause
a major rethink.

Until the election result is known and the shape of policy to come is revealed, possibly several
days yet, we think this market could be very volatile.

The Technical Trader’s view:

Long Gilt Continuous
127
126
125 WEEKLY CHART
124
123
122
121
The market is on the brink of
120 completing a bull rising
119
118 wedge.
117
116
High 112.57 115
The precise breakout level is
114
113 about 117.42.
112
111
110
The close of Friday evening
109
108 will be critical.
107
106
105 If the market breaks up, the
104
103
next reference point will be
102 the Prior High from March
2006 A M J J A S O N D 2007 A M J J A S O N D 2008 A M J J A S O N D 2009 A M J J A S O N D 2010 A M J J 2009 around 125.

SEVEN DAYS AHEAD Professional trading guides and recommendations for the World's markets

Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
E-MAIL MSTURDY@SEVENDAYSAHEAD.COM WWW.SEVENDAYSAHEAD.COM
This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.
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Long Gilt Jun 10 120.0

161.8% 119.5
DAILY CHART
119.0

118.5
The June 10 chart is
118.0
interesting: the rally through
117.5
100.0%
117.0
the Prior High 115.68 ( also a
116.5
Fibonacci) was impressively
115.68 High

116.0
fast, taking out both the falling
61.8%
115.5 diagonal from the Prior Highs
115.0 and the top of the Bull
114.5 Channel.
114.0

50.0%
61.8%
113.5 Note too, the push and close
113.0
up through the Fibonacci at
112.5
117.18.
100.0% 112.0

Volumes are high and stable.

20000
10000

29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 1 8 15 22 29 6 12 19 26 3 10 17
x10
The bull trend for the moment
2009 Novem ber December 2010 February March April May
well-established.

First substantial support on

any pull-back lies down at
115.68.

Mark Sturdy
John Lewis
Seven Days Ahead

SEVEN DAYS AHEAD Professional trading guides and recommendations for the World's markets

Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
E-MAIL MSTURDY@SEVENDAYSAHEAD.COM WWW.SEVENDAYSAHEAD.COM
This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.