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Spread Trading 18 Dec 08
Unemployment is rearing its head in a big way at the moment but the long term problems might be only just beginning. It is not known how many University and School leavers have failed to get gainful employment but an indication might be taken from the fact that we have just employed a numerate degree graduate with a First from a ‘red brick’ University. Nothing surprising in that, but…we are now in December and we were only the second interview the person concerned had gained in several months of looking. For a reputable First?
Times are not good and it will be only a few more months before next years crop of youngsters hits the street. This is aside from the reported 67% of companies that are reporting intentions to cut back on staff numbers. 67% is a frightening number and this is the percentage that was actually willing to ‘fess up’! No wonder the pound continues to slam lower.
The value in world terms of the FTSE indices has taken a real battering over the last few months. We might think that the FTSE 100 has rallied 18% from the lows in October but in Euro terms we have actually fallen 2% in the same period and this does not even include the fall in value for the first nine months of the year as well.
The pound has fallen a minimum of 25% against even the weakest of the other major currencies this year and in the same period our Manufacturing output has actually fallen.
Economists/Politicians who claim that a weak currency is ‘good’ for domestic business might ponder the perennial strength of the German and Japanese manufacturing base, countries that have had to contend with strengthening currencies for most of my life time.
This mornings opening is very peaceful on the indices with the FTSE continuing to trade around the 4300 level. The support at about 4220 has held good yet again and the resistance to any move above 4400 also continues to hold. This is making for great times for our clients who have ‘never had it so good’. Buying every fall and selling every rally is paying dividends at the moment. Of course when the break out does happen it would be wise not to stand in its way.
Settlement for the Nymex Crude January contract is likely to be some $5 under the Brent number and more than $4 less than the spot February price. Dealers can hardly say they were not warned though, with BP and others stating that they were storing oil in tankers offshore ‘waiting for a better price’. This is code for ‘onshore has too much crude sloshing around just now and we do not know what else to do with it’. Storing oil in a super tanker in the Gulf of Mexico must rank as one of the most expensive Big Yellow Self Storage facilities on the planet.
The closing price last night on January Nymex was $40.06, which was also the lowest point on the contract, the high was $148.35.
Currency markets continue to hammer the pound this morning as the momentum of the move lower seems almost impossible to stop. EUR/GBP is at a new all time high of £0.9346-£0.9348 and everyone seems in a big hurry to get to £1.0000.
The precipitous move does of course add to the problems for the BOE who apparently did not want to cut rates further because of the impact on the currency. They still, even after all these years, do not seem to understand currency markets.
Traders will buy or sell currencies in anticipation of the next rate move not in reaction to the last (aside from the immediate aftermath of a decision). If the perception is that rates are going lower then a currency will be sold. Better to get the rate moves out of the way sooner rather than hang around and watch your currency get smashed up.
Pretty soon talk will turn to ECB rate cuts and we may well then see just as sharp a move against the Euro.
Gold made an attempt at the resistance mentioned yesterday at $870-$880 but could not quite summon the energy for the break out. That said we are still very handily placed at $867 this morning and there must be a good chance for another attempt.
If we hang around for too long the markets may begin to feel that the resistance to a move higher is ‘being confirmed’ and selling may come back again.
Retail Sales are out at 09.30 which might cause a bit of angst. Expectations are for a fall of 0.6% MOM but still 1.0% up YOY. Over in the States, the Philly fed confidence indicator is out at 15.00 and is also expected to be weaker at negative 40.5 down from 39.3 last month.
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Spread Trading 17 Dec 08
Markets are reacting to the huge cut over in the states with another rally but it must be said that at this moment (just after the open) the move looks half hearted. The FTSE is up 20 points at 4330 which must be very disappointing for longs out there after the FTSE Futures were indicating almost 100 points higher than this in the evening session last night.
There are always two view points to any cut of this type, especially after just a dramatic a move just two months ago. You can be optimistic about the impact on future growth or you can sit back and worry about whatever the Fed can see that is so awful to necessitate this action.
Inflation is (apparently) no longer a problem, unemployment, not just in the US, is rearing its head, growth seems to have fallen off a cliff, retails sales have fallen so far that the 50% cuts in Woollies to offload stock now seem almost scrooge-like when compared to some of the offers on the high street at the moment and finally Money Supply (aside from State spending) is in danger of actually going negative in some areas.
Any one of these items might give pause for rate reduction consideration but all five together means that we are in a whole new universe.
This does not entirely explain the Feds move which really seems to have little to do with encouraging more lending (if you are not interested in borrowing at 1% then being offered funds at 0.25% is hardly going to make much difference). This move may be more attuned to the fact that the Fed is going to borrow over a Trillion dollars in the short term to fund the various bail outs. Given that T-Bills were trading at zero before the latest cut one is left with the possibility that the US Treasury might actually be paid money to borrow to finance the upturn. A nice trick if you can work it.
The huge amounts required by the UK over the next three or four years will take some repaying but if the Treasury can manage to issue the debt, long term, at around 2-3% (maybe lower) this would mean that the servicing of the borrow could be less painful than expected.
Traders continue to trade the FTSE range and have been rewarded with the failure this morning to break out. Clients sold heavily into the extension rally last night and were happily taking profits at the open this morning. I do not like to sound too pessimistic but if the actuality of a 75% cut in US rates and the consequent prospect of more to come from the BOE and ECB does not excite investors then you wonder what will.
Prices on solid stock with reliable returns seem to be more than generous when compared to the cash equivalent which should put a floor under markets but unfortunately this sentence includes the word ‘should’ rather than ‘will’.
The Indices have been floating on expectations that possibly some sunlight might break through the clouds but the news still appears to be getting worse rather than stabilising. I really would like to believe that we have already seen the bottom but the action of the last few days is beginning to worry.
Currency markets added to the break out mentioned yesterday, helped it must be said by the rate cut. Sterling is now more than 11¢ above the lows of last week and the cross has now moved over the high of the previous rally, $1.5535.
As mentioned, the traders currently under pressure are the weak sterling shorts who got into the game late (on the back of some rather exuberant press and analyst forecasts). While the pound may well hit parity versus the dollar at some point it is current the GBP / USD sellers who are feeling the pain and being forced into position covering.
Conversely the Euro continues to strengthen against all comers and the pressure remains for the moment on its favour. When minds turn to the ECB response to the Fed and the BOE cuts this may reverse. For the time being, unless you already have a position, it would be wise to sit back and watch events.
The weakness in the dollar caused a heavy rally in Gold and we managed to hit $860 last night. Our Capital Spreads clients are long and appear happy to remain so. As with Cable, the Gold price has now managed to break out of the series of lower lows and lower highs which have dominated the market since March. Having said that, given the support back in Apr/May/Jun, the $860 to $870 range does appear to be a biggish resistance level.
Oil might be finally responding to the substantial proposed cuts in production from OPEC and Russia but with supply still building up in storage and redundant tankers offshore we may need to see some definite evidence of this to get a big bounce going. For the moment the longs are in command today (but they were yesterday morning and much good it did them then).
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Spread Trading 16 Dec 08
Markets are slightly off on the open this morning but in truth there is little to go for. Valuations of most stock appear ‘fair’ given the position in the cycle as we try to ‘look forward’ to see if we have reached a bottom or whether there is another period of weakness to get through.
Banks continue to look weak and the speculation that further cash injections or rights issues might be required will do nothing for share holder value in the short term.
Barclays are nervously hanging on above 138p and the news that funds will come under further regulatory scrutiny, after the Madoff fraud, may lead to more redemptions and further lending losses.
As a representative of probably the most over regulated industry in the world (spread betting) I can only say that the leeway afforded to Hedge Funds has always grated. The monumental frauds now appearing would seem to indicate that it is not the micro-management TCF and ML administration that is required but a broader based reporting and auditory framework.
Trading remains very subdued...as it normally does when we approach Christmas. This is creating tight price ranges in the indices and some small recuperation in heavily sold off commodities and currencies.
Punters remain overall bullish of the FTSE and Gold but seem to have read quite a bit into the demise of the pound.
As my comment of last week warned...when even the newspapers start to talk about extreme price move potential then that is probably the moment to start taking profits and/or trading in the other direction.
GBP / USD rallied over 300 points yesterday and actually broke up through the medium term downward trend line. This may open the way up for a move towards $1.6700 as weak short positions get squeezed out.
The Euro continues to grind higher versus both Sterling and the Dollar and it too broke above the six month downward trend. Returns on the Euro versus everyone else are quite surprising given that the euro economy is (overall) doing reasonably.
The ECB will probably cut along with the BoE. With rates now down at levels unheard of in anyone’s living memory you have to wonder that there must be some impetus to the upside. In conversation with three of the brokers over the past few weeks it seems that for the first time this year there is quite a bit of medium/small fund raising managing to get done. Some of this is, to be fair, distressed borrowing but some of it is new money for new business. Are these the green shoots we have all been waiting for?
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Spread Trading 15 Dec 08
The revelations last Friday of substantial fraud by one of Wall Street’s most well know names will not do any good for investor confidence and goes to show that in today’s world of finance no ones money is safe.
The sheer size and reach of such this scam has sent shockwaves through a large proportion of the fund management industry and has also highlighted short comings of regulators who are finding it increasingly difficult to keep track of all the investment businesses within the financial sector. To describe the regulators’ job as mammoth would be an understatement. The events of the past year will only increase regulation which in turn could lead to the recovery being even more prolonged.
Despite the scandal of some $50 billion or investors cash disappearing into the ether the markets look better than they did at the close on Friday night. The FTSE is expected to open a healthy 70 points higher at 4350.
This morning has shown further pain for UK house owners after the Rightmove house price index showed house prices have fallen 2.3% on the month. A 6.3% decline year-on-year.
2009 will continue to be a tough year for the housing market with prices struggling more from the lack of finance available than anything else. With unemployment also expected to rise throughout next year it’ll be a while before things turn around. With no UK companies reporting or economic data due to be released we will most likely be in for a quiet day, but we’ll certainly be taking stock of US industrial production at 14h15 due to show an fall of 0.7%.
Tuesday sees retailers in the spotlight as we get interims from Carpetright and Kesa Electricals.
Kesa’s share price has fallen 60% in the past year and investors will be looking for new CEO Thierry Falque-Pierrotin to turn things round when he takes office in January. The white-goods market, as with the housing market, is set to remain in the doldrums. It looks unlikely that many people will be rushing to buy a new washing machine or fridge any time soon. A dividend cut cannot be out of the question.
Trading statements come from Cadbury (who’ve been doing some aggressive cost cutting recently), Drax and Go-Ahead.
On top of all this corporate reporting we get important CPI figures from both the UK and US with the UK year on year set to remain stubbornly high at 3.9%, whereas in the US CPI is expected to decline a whole percentage point on the month leading to a yearly figure of 1.4%.
The highlight of Tuesday however is the FOMC rate decision which is due to be slashed once again from 1% to 0.5% and don’t think we can’t see the Fed take the unprecedented steps of going all the way to 0%.
On Wednesday we see interims from Sports Direct and a trading statement from Regent Inns but the focus will most likely be on UK unemployment data and the BOE minutes. A rise in unemployment shouldn’t come as any surprise, but will only lead to more gloomy headlines with the headline figure due to rise from 5.8% to 6%.
Such dire employment data will no doubt have a knock of effect for retails sales due out on Thursday. A monthly fall of 0.4% is due, dragging the year on year figure down from 1.9% to 1.2%. Trading statements come from Inchcape, Arriva, Cattles and Rank.
Friday looks like it’ll be a quiet ahead of next week’s shortened trading week. As we wrap up for Christmas and commence reflecting on this year just gone, the majority would rather 2008 was forgotten.
All the chatter about record lows recorded by sterling last week has led to a temporary halt in the currency’s weakness as we hover around the £0.8950 (€1.1173). Looking at the chart it’ll be a brave man who calls the bottom of sterling’s slide. However, as we saw with the dollar this year, currencies can turn their fortunes around just as quickly as they are destroyed.
Dollar weakness is contributing to higher prices for gold this morning as bulls continue to benefit from strength in the precious metal. Currently sitting at previous resistance levels seen in November a break above $830 could mean a test of $900 again before too long.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'Online Spread Trading' by Simon Denham, updated 18-Dec-08
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