The regular monthly spread trading review from IG Index.
IG Index FTSE Trading - Jan 08
"Biggest FTSE 100 decline since September 11"
After a weak start to 2008, on Monday 21 January the FTSE 100 suffered its biggest one-day fall since the September 11 terrorist attacks, dropping 323 points by the close of play.
The month started poorly for global stock markets: prior to the major fall, the FTSE was already in the red by more than 500 points for the month, a drop of over 8%.
Even now, it is difficult to pinpoint the exact reason for such a big plunge. The fear of recession in the US was worrying markets and there were concerns that a rescue plan outlined by President Bush on the preceding Friday would not be sufficient to turn things around. But coming into Monday morning, nobody truly expected the level of carnage that was to come.
The fact that US markets were closed on Monday for Martin Luther King Jr Day did not help matters. With a lack of direction from across the pond, European markets stayed in freefall.
On Tuesday the cavalry rode to the rescue in the guise of the US Federal Reserve Bank, which declared an emergency rate cut of 0.75%. This helped markets claw back some of their previous losses.
The big question for investors, now more than ever, is where next for the major world stock markets? During January, the FTSE 100 traded back to levels not seen since October 2005. This has left many concerned that this kind of a decline is not a healthy correction but a sign of things to come.
Going into February, the market has regained the 6000 level but it is probably fair to say that the movements of 21 January have left many investors and traders somewhat worried about what the rest of 2008 has in store.
(IG Index price data: compiled Jan 08)
Gold Trading with IG Index
"Gold pushes out to record all-time highs"
With a gain of 30% in 2007, the price of gold has continued this bullish trend into 2008 with the price hitting $935 per troy ounce in January. That surpassed the previous all-time high of $875 which was set in January 1980.
It wasn't all falling markets in January. The Gold market started the year off in the same manner it finished 2007. Helping the rise of the yellow metal was a wide combination of factors, not least some of the ongoing worries about the direction of stock markets.
Ongoing geopolitical concerns also played their part, with the assassination of Pakistani opposition leader Benazir Bhutto towards the end of 2007 and the crisis in Kenya. At times like this, gold is seen as a 'safe haven' by investors and the simple laws of supply and demand mean that a flight into the commodity by buyers pushes the price up.
Of course, a weaker US dollar also traditionally helps elevate the price of gold. The last few years have seen the dollar weak and the two rate cuts by the US Fed in January put renewed pressure on the dollar. Gold benefited. The next big level that some analysts will be focusing on is the psychological $1,000 per ounce mark. During early-to-mid January, the market found support in the $850/$860 area and this could well be a zone on which traders focus in the face of any weakness from current levels.
(IG Index price data: compiled Jan 2008)
IG Index - Rogue Trader Comment
"Rogue trader loses €4.9 billion for French bank"
January wasn't a good month for banking stocks with many giants such as JPMorgan and UBS having to unveil more losses due to the sub-prime situation.
But the big banking news of the month focused on alleged rogue trader Jerome Kerviel and his leveraged positions at Societe Generale. The news broke towards the end of the month: Societe Generale, the second-largest French bank, said it had uncovered a massive fraud by one of its traders which resulted in a loss of €4.9 billion.
To put this in perspective, this was four times bigger than the losses incurred by our home-grown rogue Nick Leeson, which brought down Barings Bank in 1995.
On discovering the positions, which were leveraged trades designed to profit if stock indices rose, Societe Generale closed them out on Monday 21 January. As this was the day when European markets were in freefall this would not have helped the overall loss and the bank's selling would have added to the negative sentiment on the day.
The bank has said that Jerome Kerviel used his knowledge of its internal controls to hide his trades – although Kerviel has reportedly said that SocGen knew the risk he was taking. Even though he is alleged to have created fictional trades to balance out his positions for the bank's internal systems, some are wondering how the large exposures still went unnoticed. Presumably margin payments would have had to be met by the bank and what has proved puzzling to some is how these were not flagged by SocGen.
All of this, coupled with the weakness seen in stock markets across the board last month, meant that the Societe Generale share price dropped by 30% at its worst point in January and has left some of us thinking there are more facts yet to come out about this story.
(IG Index price data: compiled Jan 2008)
The above comments do not constitute investment advice and neither IG Index nor Clean Financial accept any responsibility for any use that may be made of them.
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'IG Index Spread Betting Markets' edited by IG Index, updated 01-Feb-08
Index of UK financial market trading articles - the regular closing market comments from IG Index...see Index.
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