Markets March Spread Trading
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A regular spread trading update by Simon Denham of Capital Spreads.
For the latest spread trading update from Simon Denham click here.
Spread Trading, 28 Mar 08
Yesterday’s market activity was a lesson in indecision. Markets went up down sideways etc but in the end closed pretty much mixed. Europe up about a percent and the US and Americas down a percent. Asia has joined Europe but not enough to influence the open this morning.
The FTSE 100 is likely to open almost unchanged at around the 5710 level having looked weaker overnight in the US late trading session but deciding, on reflection, to hold onto the gains of yesterday. As mentioned in yesterday’s comment there is a small sense of confidence brewing with our Capital Spreads clients, not huge, but enough to be noticeable on our books. The next brick to drop (whatever it is) may smash this fragile blooming but for the moment the buyers are peeking above the parapet.
The corporate news has been mixed of late but we have not seen particularly negative trading expectation statements from the various boards so the temptation is to extrapolate this into a plateau having been reached.
On the FX markets the Dollar continues to hold it own for the time being but the pound seems to have hit something of a brick wall overnight. All the majors are unchanged except for the pound which is down 80 pips against the greenback (under $2 again)….and is at a new all time low versus the Euro at £0.7894 which means that we are now over 15% down since last summer and against the median level of the last two or three years. The days of dividing a Euro price by three and multiplying by two to get a rough approximation in sterling are well gone!
With the dollar holding steady the precious metals begin to look pricey. The cost of holding long positions begins to present a problem and with no currency appreciation to help out we may see a second leg to the recent sell off. That said Financial Spreads clients continue to buy into any weakness so there is still strong confidence in the $1,000+ mark.
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Spread Trading, 27 Mar 08
Most indices are pretty much stuck at yesterdays trading levels and the FTSE had the smallest trading range this year. There may be a small amount of confidence starting to filter through into the markets and our clients seem slightly readier to buy than has been the case recently.
The FTSE is opening some 15 points off due to the slightly weaker US performance yesterday. Having said that, we are seeing buyers outnumbering sellers by more than two to one.
Currency markets were also pretty fractured but the Dollar is making a bid for some higher ground in early action and (hopefully) the pound may be dragged along with it.
Gold added to Tuesdays move with another $15 gain yesterday up to the symbolic $950 level where we open this morning. If the dollar strength is confirmed we may see a little profit taking in the yellow metal but as with the indices our clients continue to be buyers on any weakness.
Painful as the gold fall was for many traders, the fallout in the Silver spread betting market was even more dramatic. The price dropped from a high of $21.40 to a low (just before Easter) of $16.70 a move of over 20%. In gold terms this would have meant a fall to close to $800.
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Spread Trading, 26 Mar 08
A nice big bull day yesterday and my comments concerning a secondary rally from my initial call of up 120 came to fruition as the bears were squeezed in the sunshine of a strong bull move and we closed up almost 200 points at 5689.
Markets did almost nothing overnight and the US also closed virtually unchanged after Monday’s excitement. His means that Europe’s day of catching up is now over and we must look at where we are once more.
The last five trading days in the FTSE have had four 200 point ranges which does not look too much like a market on the brink of settling down but it might be interesting to note that the actual major supports held at around 5460 for four days in a row which may give the long suffering bulls something to go on. The market is still, obviously, in a negative trend but all trends must end some day.
The early call today is for the FTSE spread to open some 40 points lower at around 5650 as the exuberance of yesterday quietens down a bit. Sellers will have noted that 5700 held steady three times in yesterday’s session. Buyers will probably remain on the sidelines until a more certain indication of stability is evident.
Looking at the FX markets, the pound has regained some composure after last weeks drubbing and we are back above the $2 level. The pound has actually managed to regain something against the Euro as well (but given the fall out over the past few months this is small comfort). As mentioned yesterday the support for the GBP / USD currency pair is at $1.9750 which held well over the Easter break. The bounce has now taken us up to a spread of $2.0040 - $2.0043. Clients are not exactly leaping in expecting much more to the upside and it appears that we may be doomed to trade the $1.9700 to $2.0400 range for the foreseeable future.
Xstrata will take a pummeling on the open as the bid failed to progress. The stock is expected to drop almost 10%. Ouch.
In contrast, the commodities markets were a bit brighter yesterday and Gold managed a $25 rally as buyers came in expecting a continuation of the rally after the recent sell off. Weakness in the dollar also helped slightly but volumes were light. The gold spread is opening at $937.8 - $398.3 unchanged overnight. The support at around $905 (where there was quite a battle a month or so ago) held well over the last few sessions and the bounce will have taken out quite a few weak shorts. We are now back at the levels that were quite a resistance to going higher in January so a close above $940 would be welcomed by the bulls as possible evidence of a rejection of the recent falls.
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Spread Trading, 25 Mar 08
Markets look to be on the up this morning as the early call is for the FTSE to come in some 120 points higher at around 5620 after yesterday’s rally in the US and Far East. Notwithstanding this opening call, the performance of the UK’s premier index has been something of a disappointment in recent days as we eye the 800+ point bounce in the Dow and today’s 1000 point push in the Hang Seng. The relief rally caused by the Fed’s various moves seems to have, largely, passed us by. On an equivalent move for the FTSE versus the Dow / S&P we should be somewhere around 5800.
Having said that 120 pips isn’t bad and investors will be cheered by the news. The news that JP Morgan has increased its offer for Bear Stearns by 500% (this must be something of a record!) will have the financial sector on the up and up and the calls for Barclays, HSBC and yes even HBOS are for substantially shifts higher. Any latent shorts will be suffering this morning and there is a good chance of a secondary rally on the open as weak bears are forced into covering positions.
The global increases in margin requirements (although our Capital Spreads clients will have noticed that we have kept ours at the same very low levels throughout the last year) will probably mean that revenue for many brokers will be cut back as clients deal sizes are reduced. And for the longer term might harm the wider market as speculators will be less able to ‘gear up’ into significant holdings.
Whilst we were shivering through our Easter egg hunts yesterday, the Dollar made an attempt to push back below $1.9750 but the level held and in doing so has brought some buyers back into the cross. The Sterling / Dollar spread is now back above $1.9900 at $1.9923 - $1.9926 and clients are looking to build on longs.
Commodities also had an exciting time of it yesterday with Gold trading the $912 to $925 range several times and this morning jumping $12 from the aforementioned low of $912 where we closed last night. This morning we’re opening the gold spread at $924.5 - $925.0. The pull back from the highs of $1030 has been quite spectacular but recent retreats (over the last two/three years) have generally been worse than this so ‘new’ bulls should be wary of getting too excited by the chance of ‘getting in’ at a cheaper level.
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Spread Trading, 20 Mar 08
The FTSE spread is called to come in 70 points lower on the off as the index reacts to the 300 point drop in the Dow. This means that virtually the whole 200 point rally of Tuesday has now been removed and we are back down below 5500 at around 5475. The fragility of sentiment was dramatically shown by the ease with which a small rumour about HBOS managed to snowball into a semi crisis.
Brokers across the globe are being squeezed for margin by exchanges and clearers and several small ones have now given up the unequal struggle. Margins from many CFD providers are now being increased dramatically as they are being asked to place more money on deposit. This has a dramatic effect on trade volumes as clients are in the first instance forced to sell off some of their holdings to make the new higher margin call and then on an ongoing basis are only able to trade in reduced volumes.
The fall out in the UK yesterday afternoon may well have had quite a bit to do with the fact that one of the major players effectively pulled out of the CFD business by putting margins up to 75% on most of their markets. Clients will have been forced to either suddenly come up with huge sums of money or manage to open new accounts with a competitor and transfer the positions or been forced to sell positions into an already weak market.
In the Forex spread betting market, last week, sterling was looking nicely poised for a bit of a return but in the last few sessions the hopes have been cruelly smashed. The pound has fallen from $2.0400 to $1.9800 and the rally above two bucks is beginning to look like a dead cat bounce. Against the Euro, the last three days trading ranges have been quite extraordinary for, normally, such a stable cross. The price has oscillated between £0.775 and £0.790 (almost 2%) on each session.
It would be nice to think that this volatility was symptomatic of activity that sometimes takes place at the end of big directional moves and that the Euro might be looking to weaken versus the pound from here.
On the commodities front it was nice to see after all the press comment on Tuesday about how everyone should be buying Gold that the yellow metal has (in just three trading sessions) dropped almost $100. As mentioned in yesterdays comment our biggest and longest term Gold longs all sold out on Monday, well above the $1,000 mark. Readers who followed their lead will be sitting on nice little profits now. With the gold spread betting market at $936.0 - $936.5 we are still very much in a bullish momentum move. However, as with all big trends there will always be major corrections to shake out the unwary or the overly aggressive (otherwise we would all be millionaires!).
The Daily Comment will continue after the Easter Break.
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Spread Trading, 19 Mar 08
The FTSE managed to reverse the entire 200 point fall of Monday with a 200 point rally yesterday. This morning, after the US markets managed to climb through out the evening session, we are opening the FTSE spread 35pts higher at around 5640. To be honest our Capital Spreads clients are having none of it and are busily selling into the move. This could prove to be a dangerous strategy as, even in bear market conditions, we can have nasty little spikes higher.
With so many people now negative just such a prolonged bear squeeze could be on the horizon.
Oddly enough if we were coming in to work this morning having fallen asleep on Friday night we might be asking what all the fuss was about. Nearly everything (aside from the fact that we have one less bank on the planet) is at the same levels as Friday’s close. This is what we need, a period of consolidation around stable levels. Unfortunately the chances of it happening seem very slim.
The dollar which had managed a bit of a rally yesterday on the Fed announcement is giving it all back again this morning. This is causing a bit of a move higher again in Gold as the yellow metal strives to recover from the vicious sell off over the past two days. Highs to lows in Gold from Monday morning to yesterday evening were some $60 and we can anticipate that there were some nasty hangovers from weak buyers who were coming in late to the commodities party. Two of our biggest Gold bulls actually sold out of their very long term positions on Monday morning (wish I had followed them!) realising massive profits. No doubt they will be back in at some point but even the drop to $975 last night did not tempt them.
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Spread Trading, 18 Mar 08
As mentioned markets are a tad quiet in the pre opening hours with the Dax now moving 100 higher to 6290 and the FTSE up at 5515. There will be talk of 'dead cat' bounces etc but nearly all eyes will be focused on the Fed rate announcement this evening at 18.15. Expectations range from 0.5% to 1.25% (can you have a negative interest rate?) cuts which will probably give us one of those big rallies that the Americans are so used to these days.
The Dow bounced off the 11750 support yesterday and the S&P found some help at the same low it hit in the January fall out, 1255.0. Bear markets are, seemingly, just not tolerated in the US where the right of investors to make money buying shares appears to be almost enshrined in the constitution. Short selling of stock is still almost unheard of for the average US investor (most brokers require 50% margin to allow a client to sell stock he does not own) and anyway profiting from falling stock prices is an almost 'un-American' activity.
Commodity markets had a pretty solid reversal yesterday after the huge early move in Gold was completely turned over by the close.
Brent Crude Oil fell $4 yesterday to 'just' $102.00.
Platinum fell 5% meaning that it has now given up almost half of the recent Jan/Feb rally.
In the softs markets there were almost universal falls as longs were squeezed all day. There has been a huge allocation of speculative funds to the various commodity markets and volumes are many times the norm. If Margin calls are increased here as well we might actually see quite a nasty little bear move in the seemingly all powerful commodity sector.
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Spread Trading, 17 Mar 08
So where the hell do we start?
It is very difficult indeed to get anything positive out of the Bear Stearns implosion. For those who love to hear about banker woes a very short lesson in the consequences of the latest disaster on Wall Street should be sufficient.
This means fewer jobs in the UK. Plain and Simple. University graduates landing in the open market this summer will find very few new positions being created across the economy. From retail, advertising, building, financial etc the cry will be “make do with what you have and cut back where you can”. No room in that for “please sir, I need new budget approval for more staff”.
I have been asked many times over the past weeks and months about my expectations for market direction. It has been difficult (as readers of this comment will know) to be anything other than pessimistic even when we get bullish days. An analyst on Friday morning (admittedly working for one of the investment banks involved, not Bear Stearns) somehow managed to say that the Fed’s salvation package was a good thing as the market now knew that the US Treasury was willing and able to do what was necessary to maintain stability. Well he may be right in the long run, but as we view the wreckage of Bear Stearns in the early light of Monday morning (a company worth many billions of dollars just seven days ago and now sold for a pittance) the silver lining is very difficult to see.
Speculation will now focus on the other, weak, investment banks. Mere rumour was enough to do for Bear Stearns as deposit holders rushed to extract their funds. Now we actually have a factual failure. Who is going to risk being a deposit holder in the next domino to fall? In this scenario we could see the destruction of several institutions over a very short period of time and the eventual rise of just a few "super" entities.
The markets are likely to open significantly lower this morning with the FTSE called down another 100 points and the Dax already trading 150 lower than Friday’s close. The Nikkei lost 450 points, the Hang Seng another 1000.
The dollar has fallen to yet a new all time low vs the Euro and is off almost 2 cents overnight against the yen. Even worse for the UK, the pound, which just recently had been holding its own against the greenback, has actually managed to fall vs the dollar since Friday leaving Sterling almost 500 pips worse off against the Yen (well below the 200 mark at 195.36-195.44) and at a new all time low vs the Euro at £0.7851 - £0.7853 (100 pips worse than Friday's record low close!).
Holidays on the continent are starting to look a tad expensive!
As the fear over asset values continues to sweep across continents, Gold powers on unabated. It is trading $27 dollars higher than Friday’s close an impressive move in anyone’s language. As the dollar has fallen some 2% versus the Yen the rally is not so impressive in far Eastern terms but still marks new all time highs. And, as I have commented many times before, it is a brave man who fights against the tide. Although I must also add that I personally believe that Gold, in the long run, is a very poor investment tool.
Momentum in commodities is likely to accelerate again today on initial opens and if the US allows the deterioration in the dollar to continue unabated we will see continued inflationary price pressure. From the viewpoint of China, Japan, Russia etc all those dollar holdings (trillions of them) picked up over the past decade or so are now worth some 25% to 30% less than last summer. These are real losses and the bond holders concerned will not be happy with the benign neglect of the Fed. Italy (with a stable and appreciating currency backing up its bonds) failed to get its government bond auction away last week. What hope for the next US Treasury issue? The US depends upon the influx of foreign buyers to sop up all the issuance. If this disappears who will pick up the slack? Probably not the investment banks you can be sure of that!
A pessimistic note today (again) but unfortunately if this is the beginning of a recession (say it quietly) then we probably have months, if not years, before the good times return.
For the latest spread trading update from Simon Denham click here.
'Markets March Spread Trading' by DB, updated 28-Mar-08
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