Spread Betting Week 33
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The regular Spread Trading Update from Simon Denham of Capital Spreads.
For today's update >> Spread Trading.
Spread Trading - 15 Aug 08
As is the markets wont the confirmation of economic woe across Euroland and a sharp rise in US inflation caused a strong rally as err...I’m not sure really. Short covering? Acknowledgement being half the solution? Small furry things from the planet Zarg?
Anyway the outlook today for the Indices is pretty peaceful on the open with the FTSE called a sliver higher and the Dax 30 up about 20. Interest will focus on the commodities again with Gold smashing down through the $800 level overnight as Goldman Sachs give a mid $700 target in the short term. Crude Oil also likely to open $1.50 lower as the Dollar continues to head higher.
My commentaries over the past month have tried to warn clients of the impending pressure on currencies versus the Greenback and the probable effects on commodity prices but I have to admit that I might as well have been shouting into a bucket. Buyers of Gold and Oil continue to outnumber sellers by a significant margin and clients have been long of Sterling, Euro and Yen versus the Dollar for the last week.
This morning sees the pound off another 120 pips with the Sterling / Dollar spread at $1.8562 - $1.8565. We are now sitting just above the massive 2006 support level at around $1.8525. The cross has lost almost 16¢ in less than a month which must be something of a record even for the Pound. What is even more startling is that it has managed this fall without a single ‘dead cat bounce’ and we have had eleven straight down days in a row.
The Euro has done almost as badly since rejecting new highs on the 15th July (a sell signal of huge importance). The market is now back into the $1.4300 to $1.5000 trading range which dominated business from November to March. The Euro / Dollar spread at $1.4744 - $1.4746 it is difficult to be anything other than bearish even now as the trend looks to be heavily against it. There is massive support at around the $1.4450 level which represents the trend line support level for the entire Euro rally of the last three years. A break of this would possibly indicate a renewed shift lower with the $1.35 range being the obvious target. If the support holds then shell shocked bulls might hope for some relief but the sheer pace of the drop over recent weeks creates its own momentum and traders may find it difficult to put the brakes on the current direction.
There is precious little information this morning and dealers will be looking to focus on the US Industrial Production and Capacity Utilisation numbers out at 14.15 this afternoon. The weak dollar (until very recently of course) was expected to have helped with export growth but the overall slowdown has probably cancelled out this boost. Forecasts are for a flat production number (0%) and for an easing in capacity to around 79.8%. At 15.00 the Michigan confidence figure will also hit the wires and it might interest readers to know that this is actually forecast to have a bit of an up tick from the July number. I suppose there is a limit to just how negative people can be.
Trading remains very active across a wide spectrum of instruments as volatility continues to attract greater and greater interest across the financial landscape. Times of increased activity tend to last for a considerably longer period than many expect with increases in volatility generally lasting for over two years. We have just passed our first anniversary of the start of all the chaos which we can see began on or about the 24/26 July last year. Oddly enough the low point of the initial reaction to the impending credit crunch was a year ago tomorrow when a huge 1200 point one week drop in the Dow ground to a halt.
Trading ranges over the last month have been exceptional in the US spread betting markets with 250 points a day being quite normal for the Dow. The trend since mid July has been higher but the intra day moves within this have been almost frightening.
It remains a dangerous market to be playing in (no matter what product you look at). Small stakes and quick exits are definitely advised.
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Spread Trading - 14 Aug 08
The city may be basking in the early morning sunshine today however on the markets there is very little to be cheerful about. Swerving Mervyn released the Bank of England's quarterly inflation report yesterday which implied that interest rates were going to remain at 5% for the remainder of the year even though inflation was going to rise to over 5% on the CPI measure, a whole 3% above its target. This gave the FTSE a short term bounce but when reality hit home and the markets realised that the Central Bank was going to use a recession rather than Interest Rates to cool inflation the FTSE then fell back down to 5450. That still looks a little pricey given the current torrent of bad news and the Financial Spreads Account holders are continuing to increase there short positions in expectations of further falls.
Sterling does not seem any more optimistic with the interest rate with Hawks being shot out the sky yesterday as Cable plummeted to $1.8700, a level not seen since October 2006. At the moment clients are trying to feed on the bottom of the market but I feel that they may in for more pain as the next support level looks to be at $1.8200. With the States looking like they are going to raise rates in the next quarter the long term prognosis for Cable is pretty bleak.
Although we might now be seeing an end to the commodity bubble the oil inventories released yesterday managed to push Nymex Crude Oil back above $117 per barrel. Inventories were lower than expected but with demand for the black stuff falling by the week as the global economy cools, the medium term trend is most definitely negative. Having said that, our Capital Spreads clients are taking the contrary view.
Gold is not looking too positive either with it effectively trading as a currency against the dollar. With the dollar looking unstoppable, gold looks certain to retest the $800 level on the downside which, if broken, could see a sharp fall back down to $650 where it should find a good level of support.
This afternoon will reveal the latest CPI figures out of the States which are expected to peak over the 5% level. Before that we will see the EU GDP which is rather optimistically predicted to be 1.5%. Both should provide a bit of short term volatility to the markets, however with rising inflation and falling growth in pretty much every developed country, the ugly head of stagflation is getting closer and closer to the surface.
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Spread Trading - 13 Aug 08
This morning sees the FTSE and Dax off a tad in response to the US late move and the further weakness in the Far East. We are opening around 5510 in the FTSE, off about 25 points and 6540 in the Dax (50 lower). JP Morgan who had been one of the stars of the Financial Sector finally succumbed to credit deterioration and even the mighty Goldman Sachs suffered a rating downgrade as the lack of new business continues to impact income. The Credit Crunch continues quietly to impact growth potential as banks remain reluctant to increase corporate loan books. In fact we seem to be seeing something of the reverse with weaker debt being offloaded as banks continue to shore up their balance sheets.
Gold is seeing a bit of strength today, up over $7 to around $823 as we look to regain some respectability. The precipitous falls of recent days are very likely to get some form of ‘bottom picking’ but with interest rates remaining high and the dollar looking to be in recovery mode the attraction of the yellow metal at these (still very high) levels is difficult to justify. If the Georgian debacle was unable to make an impact then what will? Having said this, the support at just above $800 has held steady under heavy pressure and we have fallen a huge distance in the last month so there is the potential for a bear bounce to develop.
Sterling has regained the $1.90 level this morning but the Cable chart bears a remarkable resemblance to the Gold one since the turn of the year as commodities have become something of an ‘anti’ dollar play. Punters are long the pound at the moment having bought in strongly late last night on the closing weakness. As with Gold there is the chance of some form of bear rally but dealers remain wary of any weakness and spread betting clients should be cautious of over-extending exposure.
Oil is actually quite quiet this morning considering all the news headlines over the past few days. Although the close yesterday was just a little lower than Monday this hid a $4 trading range in the afternoon. This afternoon we have the Inventory numbers out of the States and this is likely to add a bit of spice with bulls hoping for some support to help the ever weakening price levels. There is a chance that we could just drift all the way back to $100 and beyond but as with the currency markets it would be wise for dealers to tread warily.
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Spread Trading - 12 Aug 08
As markets digest the Georgian situation it is not difficult to see that whilst the West’s politicians (and major newspapers) might talk Russian aggression the real culprit for the debacle going on in the Caucuses is almost certainly the Georgian Premier himself. Having declared a ceasefire last week his forces were then ordered three days later (when Putin was safely sitting watching the Olympic opening ceremony) to annex the troublesome South Ossetian province. The reaction of the Russians should actually be applauded as this type of ‘adventurous’ militarism is out of place in the modern world.
The actual result for Russia will probably be all favourable as the chances of Nato now accepting Georgia into it’s fold is remote. Can you imagine what would be going on now if the nation had been a member of Nato and had US or European forces in situ?
Normally Gold is a Bell Weather for troubled times and in this instance dealers would have also added Crude Oil into the mix with some 1% of all world supply coming through the South Georgia pipe line. But what has happened? The yellow metal has fallen to $810 this morning some $45 lower than Fridays close. A fall of almost 5% in just 24 hours after opening about $10 higher yesterday morning. Oil also attempted a brief move to the north but as the day progressed and US criticism remained muted sellers took the upper hand.
Trading in the FTSE this morning remains to the downside after the recent bear market rally. With the Mining and Oil sectors coming under heavy pressure many will be faced with the long term effects of higher production costs with falling product price. The darlings of the last three years risk turning into Pariahs.
Punters continue to try to oppose market moves with buyers of the dollar and commodities well to the fore. Hopes for some sort of bounce to appear are fading as we progress and the pain of the longs may well get much, much worse. Gold has fallen through some very strong support levels and in the current environment faces the prospect of a possible drop all the way back into the $600’s. The fact remains that of all the commodities Gold is a cumulative product. At the end of this year there will be more in circulation than last year. The same cannot be said for the consumables (oil, coal, gas).
In the Forex Markets the dollar seems to have finally turned the corner and investors will be waiting to see if the recent moves will turn into a longer term trend. With Sterling below the $1.93 level the momentum definitely favours further weakness and the extreme levels reached by the Euro do not exactly lead to confidence that even after the recent falls that there is not the possibility of more to the down side. $1.35 has been mentioned as the target level for the longer term shorts.
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Spread Trading - 11 Aug 08
After last weeks quiver full of information this week looks a tad light on the corporate data front. On the other hand Treasury information is much fun packed with PPI, Trade Balance, CPI, RPI and Employment numbers all likely to give an increasing headache to policymakers.
Monday’s data numbers include the aforementioned PPI (in all its ramifications) and the Trade Balance. Oddly enough these are all expected to either ease slightly or to just show small upticks. Although of course in the case of PPI Input data a move down from 30.3% to the expected 29.8% is not exactly a reason to hang out the bunting.
Overall PPI output is forecast at 10.3% up from 10.0% and this number shows (if anything) how much of a hit the end producers and the high street are taking on their margins. The inability of sellers to impose price hikes onto the end of the food chain (you and me) in the current squeeze on consumer spending is striking and indicates that numbers from the retailers for the next Qtr are likely to be grim.
The trade balance is likely to be above £7bn once again but is expected to show a slight decline from last month as people refrain buying that new BMW or replacing their Zanussi washing machine. In the fallout from the financial credit crunch the ‘invisibles’ side of the equation is likely to suffer as the city fails to match previous years growth this is very worrying for the government as foreign earnings through financial services have bolstered much of their spending plans. The administration is in a bit of a cleft stick as all these profit slumps from the major banks add up to billions in lost corporation tax allied to this is the £3-4bn lost in Stamp Duty income and the fact that some major players are toying with the idea of removing themselves from the UK tax structure completely thus knocking any hope that a rise in tax rates might help with the shortfall. The Public Sector deficit is not likely to make for light reading over the next year or so.
Tuesday sees Intercontinental Hotels reporting interims. If you were looking for a sector that you would have though would be directly impacted in current trading conditions hotels should be near the top of the list. But the opposite appears to be the case, organic growth continues apace and the company is expected to show profits of around £145m for the first half up from 116m.
Thompson-Reuters is also giving interims today and these are also expected to be on the positive side. This might also come as something of a surprise as the sale of financial data might be considered a falling commodity when banks come under pressure. The fact is that the providers are becoming ever tighter on the provision of data and are charging considerably more for information and in many cases moving ‘free data’ into chargeable units. The company is expected to show LFL growth of around 6%.
Also reporting will be Collins Stuart who are expected to have slightly worse numbers but with the swirling rumours of takeover in the wind not many people will be concentrating on these but will be hoping for a statement from the board.
Official data today moves to the hotly disputed CPI and RPI numbers for July. The market is expecting a month on month fall in both figures of 0.2% and 0.3% respectively but a YOY hike to 4.2% (from 3.8%) and 4.9% (4.6%). Unless the numbers for July ‘07 were unbelievably weak it is difficult to equate a falling monthly figure with a rising annual one but who am I to comment.
The States also chip in, in the afternoon, with their Trade Balance which is expected to increase to $62bn which does not say much for the apparent resurgence of the export industry.
Wednesday dawns with Thomas Cook who, like Intercontinental, are expected to show that holidays are the last thing that people cut back on in times of trouble. In all likelihood the actual savings will be on spending once the holiday maker gets to his/her destination not on the actual holiday package itself. Until unemployment becomes a reality rather than a spectre the holiday package companies are likely to remain strong(ish).
Another company riding what strength there is out there is Balfour Beatty and their interims are likely to show that major infrastructure projects remain on track. H1 profits are expected to come in around the £89m mark up from £76m. Big projects are years in the making and the current slowdown is not likely to impact revenues. In fact governments tend to use high profile projects to kick start economies so BB may be in a good position to ride out any storm.
British Energy will report on Q1 numbers but again the numbers will play second fiddle to the ongoing takeover/merger (or not) furore going on around the company.
Economic data at 09.30 will focus on Average Earnings data. Whilst the BoE will be mindful of the CPI and RPI numbers you can bet your bottom dollar that it is wages that is uppermost on their minds. If the inflation spiral does take hold it is here that the battle will be most fiercely fought. If companies and government are forced into ever increasing salary hikes then whatever the BoE does will count for little. Unfortunately it is only the fear of unemployment that will restrain wage claims and in the case of Government this is almost non-existent. Coupled with this is the fact that the Labour Party is almost bankrupt and therefore at the mercy of its paymasters, the Unions, and you end up with a situation where the spirit may be willing but the flesh may well be weak.
From the US we will see the business inventories number which investors will hope backs up the Wholesale Inventory numbers which kick started the huge rally on Friday. Forecasts were at 0.5%+ but we might be looking for more than this now.
Thursday sees house builder Bellway come to the podium and what can you say? The numbers are hardly likely to have improved as mortgage approvals have slumped even further in the meantime. In touring a building project yesterday I was rather put off by the fact that most of the (almost finished) development remained on the books. It would be difficult to justify moving in when most of your neighbours would be empty units encouraging vandalism and, if things got worse, falling sales valuations.
British Land’s numbers will be completely overshadowed by the write down of the book value and investors will be nervous of any deterioration in outlook from the board.
In the afternoon we will get the US CPI data and this is expected to show a YOY number of over 5%. Remember the States have interest rates at just 2% as opposed to the UK with rates at 5% against inflation of around 4%. The US appears to have given up on the inflation battle in favour of growth. Weakening commodity prices will probably not have moved into the numbers just yet.
Friday looks to be a bit of a desert from the UK with only the weekly sale data from John Lewis to ruffle the water. Hopes are for a continuation of last weeks numbers.
Over stateside we get Empire Manufacturing number for August out at 13.30. This is expected to be down by 4.4 but that would be better than July’s data. Industrial Production data at 14.15 is also a bit soft with expectations of 0.0% showing that the weak dollar has not yet filtered into exporting strength (or at least not enough to make up for weak domestic demand) and Capacity Utilisation out at the same time is likely to underline this with a fall to 79.8 from 79.9.
Bringing up the rear for the week are the University of Michigan confidence figures due at 15.00 and these are expected to give a small to boost to hopes that things are nearing a bottom with a slight pick up to 61.8 from 61.2.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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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.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Spread Betting Week 33' edited by SD, updated 17-Aug-08
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