UK Markets 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, 1 Feb 08
When the going gets tough the blame game begins and one of the easy targets in every period of uncertainty is the banks.
You can hardly open a newspaper today without reading some journalistic outpouring, railing against the evil conspiracy of global money. It might be a good moment to point out that one of the main reasons for virtually every success story in the world has been because somewhere a grubby money lender saw the potential in the project presented. At some stage almost every business must borrow to expand and it is the financiers who stake their money (and in many cases, careers) on your success. Little thanks they ever seem to get for it but then the money lenders are forever the villains in popular and classic fiction.
But, at the moment, unusually even the banks are turning on themselves. Analysts are falling over themselves with ever more bearish forecasts, Treasury Money Market desks are ever more weary of lending to each other and regulators are lining up to add even more red tape and constraints. Banks are the building blocks of capitalism and we strike at them at considerable risk to our overall wealth. The regulatory burdens are now so high that it is almost impossible for new banks to start up. Can anybody name a single new UK bank in the last 20 years? It used to be ‘the big four’ now we can almost say ‘the only four’.
When bank shares fall we should all worry as lower capital values constrain new lending. This means that all businesses find it ever more difficult to get a share of the shrinking pot and ultimately translates into slower growth.
Well, the markets are still acting like headless chickens with yesterday’s activity almost taking the prize for the most ridiculous to date. Early action saw the FTSE 100 fall 150 points only for the market to turn round on absolutely nothing at all and end the day 40 higher. As the Europeans went to home, the Americans picked up the baton and pushed prices even higher only for Google to give a disappointing trading announcement which caused the Dow futures to fall 180 points in just 8 minutes! Not a day for the faint hearted.
The FTSE 100 Spread is called 30 up this morning at 5910-5911 which is just below a bit of a resistance level at 5920. For all of the bad news around it is wise to remember that the UK is (apparently) still growing. We should only really get worried when the employment numbers start to look grim and just at the moment the opposite is still the case. On this note, this afternoon sees the mother of all economic data, the Non Farm Payroll numbers out of the States. This figure has been the most watched number in the economic calendar for a very long time and still just about retains top spot. We are expecting a number of plus 70K and this is in an economy which is rumoured to already be in recession.
We can expect a very quiet morning today as dealers flatten out positions in preparation for the chaos that always ensues a major data release. However it is always prudent to remember that in bull markets even bad news somehow gets a rosy reading whereas in bear phases the opposite is generally the case.
FX markets are absolutely comatose at the moment and we are trading and re-trading over the same ranges. The pound is pretty much where it has been for the last three days (around $1.9900) with resistance at around $1.9940 to $1.9950 and support at $1.9835 to $1.9850.
Sterling Yen trade is also struggling to get above 212.35 and 213.75 but is also finding good buying at anywhere below 210.50. The current price of 211.75-211.83 is pretty much mid range and does not give much help to either the bulls or bears.
Gold is also strangely attracted to the mid $920’s and this morning we’re seeing a gold spread of $926.2-$926.7 with punters still buying on any weakness. The charts are beginning to tighten up so we can expect a break out quite soon in one direction or the other.
Crude Oil is also stuck at around current levels with Brent Crude Oil March spread at $92.20-$92.25. The attempt to the downside yesterday was swiftly defeated and this will be giving the bulls some optimism. On the contra argument, we are now coming out of the winter months and demand for the black stuff will abate to some extent.
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Spread Trading, 31 Jan 08
So the Fed cut rates eight days after the last shift, but why do I feel that the biggest economy in the world is being run on a day to day basis with policy makers reacting to each and every little toss and swirl of the markets.
Last week we had a 0.75% cut which was odd enough. Did they have a game of paper, rock, scissors over whether to go for 1%, 0.75% or 0.5% and rock won? To follow it up only a few days later with another 0.5% smacks of desperation. The theory going around is that the Fed does not want to be seen as having being spooked by the Soc Gen debacle about which they were as in the dark as the French Government and have therefore followed up last weeks panic move with a further cut. A bit fanciful but the whole thing does look a bit strange.
Why did they not just cut 1% last time and then look to see how this affects the markets/economy (along with the $150bn spending injection)? They can hardly claim that eight days is enough time to gauge anything at all.
As mentioned in an earlier comment the Americans are painfully aware of the impact of falling markets on their savings and future well being in a way that seems totally alien to the huge majority of European citizens. Most Europeans rely on company or state pensions to support them in their dotage but in the States (in the main) it is down to the individual to set aside funds for their old age. This, unfortunately, can lead to the not unreasonable impression that it is the markets that wag the Fed rather than the other way round. An environment of reasonably high interest rates (good US T Bond yields), a buoyant stock market and rising housing prices has the American electorate feeling wealthy and happy. Unfortunately all three of these are now moving in the wrong direction.
Last night saw the markets taking a rather exciting turn with the Dow rallying over 200 points on the Fed announcement at 19.15, only for traders to give it all up, and some, in the last 40 minutes of action. The US indices all closed in the red but the effect on the Europeans will be minimal this morning as the final prints from the Dow, S&P and Nasdaq were only a whisker away from the levels that prevailed at the 4.30 Europe close.
There will be a certain sense of disappointment that after yet another cut we did not have the market reaction to the dramatic slashing of last Tuesday week and this may cause some early weakness.
The FTSE is being called some 15 points lower with the FTSE spread around 5820-5821. In truth we are not seeing any real selling in pre-market action and (in fact) we are getting quite a few nibbles from punters looking for some bullish reaction to last nights activity. At one point in the evening trading as the Dow hit 200 points higher we were calling the FTSE to open at over 5900 today so traders know that there is a target to go for.
Shell’s numbers were a nice start the day and we can expect a bit of a move in the stock in early trade. Having said that banking stocks are likely to remain weak after yet further write downs in Sub Prime holdings (this time from the Europeans).
Looking at the FX markets the pound did its best to get back above the $1.9915-$1.9930 resistance mentioned yesterday. It even achieved a short term break but by the close we were back below the level and this morning the sellers are taking us down into the mid $1.98’s. Sterling holders must be beginning to worry that even an unexpected 1.25% widening in the Pound/Dollar rate difference has only had a very minimal impact. If we start to see a bearish move develop then we could fall swiftly back to the $1.94 / $1.95 region of a week or so ago.
Versus the Yen Sterling seems to be unable to make gains above 214.00 and we have now failed around this price several times in the past four or five sessions. Sellers will be hoping for further weakness down to the 205 level but in truth, at the moment, the momentum appears pretty sideways.
So the commodities markets. Gold was also a big mover last night. It might not seem like that this morning. After the Fed’s announcement the price of gold moved to over $940 (I am not sure why). However, after a moment or two the buyers also had second thoughts and we have ended up this morning back down at $920 with the sellers making themselves felt.
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Spread Trading, 30 Jan 08
The Markets continue to give a remarkable impersonation to the undergarments of our ‘oldest profession’ and it is difficult to really get a handle on what is going on.
The Markets seem to be giving differing long term trend signals every other day culminating in last Friday’s action creating a very bearish ‘Hanging Man’ technical candlestick followed by a very bullish ‘Hammer’ formation on Monday. You pays your money and takes your chance.
Today as I look across the Spread Betting dealing floor populated by my 2 year old daughter (on a salary of £25K per annum to keep me informed about the influential youth economy) and my 7 month old son (earning £15K for scientific analysis of nappy retention capabilities) I was tempted to ask my, sadly deceased, father (earning £45k on the technical analysis desk) for some help from ‘the other side’. Unfortunately the omens were apparently as opaque as the ones on this side of the veil.
Today the markets are looking a tad weak after the Far East refused to join in the US rally and sold off substantially in a nervous session. Having fallen 80 points on Monday, the FTSE rallied a hundred points yesterday. It is now trading 50 points down today with a FTSE 100 spread around 5830-5831.
The volatility of recent months shows no signs of abating but a few analysts are peeping over the shell holes of no-man’s land and encouraging some of the foot soldiers to ‘go over the top’. Valuations do look very tempting at the moment and those lucky few with cash to place are being advised to place a little of it at current prices. Interest rates are unlikely to go higher so dividend returns will become more and more important. Companies with solid dividend cover (2 to 3 times) are probably the best bet at the moment for long term investments but for the short term players the markets continue to look too dangerous to get over exposed.
The pound / dollar cross continues to grind its way towards $2 this morning but the effort is beginning to look quite tough. There is some solid volume and technical resistance between $1.9915 and $1.9930 which might take some getting over but if this is achieved dealers will then be looking for a swift shift towards the two buck mark once more. On the downside if the markets fail at this level then there could well be a sharp displacement back into the $1.9500 to $1.9750 area which defined the range for most Spread Betting Companies for much of January. The current GBP / USD spread of $1.9907-$1.9910 gives both the short term bulls and bears hope for this morning.
The Yen is also having another go at the Dollar as the cross struggles to get above 107.25 and below 106.00. The momentum is still dollar unfriendly and the recent sideways direction may be an example of the market pausing for breathe before continuing its move down. At with the Dollar / Yen spread at 106.65-106.67 this morning we are seeing very little action from punters who seem happy with the positions they have.
Gold is stable at (or near) the highs but with the dollar slightly weak overnight we might have hoped for some positive price action this morning. Unfortunately this is not the case and the yellow metal is off a touch with the Gold Spread at $921.4-$921.9. If we cannot recover the closing levels of last night this may build into a bit of profit taking. As mentioned before, the bull sentiment is so well established that quite heavy falls can be accommodated without impacting the overall trends.
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Spread Trading, 29 Jan 08
As we bemoan the virtual lack of anything remotely approaching political variation in the UK and Europe, the rest of the world is showing what a dangerous game democracy can be. Many countries have borders drawn up by colonial masters some 100 years ago and few of these arbitrary lines paid any attention to local tribal or religious differences. Today we can see that across much of Africa very little of what we would term political ideology has much bearing on which way votes are cast and all to do with which tribe the contestants stand for.
Whilst we in Europe may feel that we are immune to this type of activity it is quite easy to point to the ex-Czechoslovakia and Yugoslavia and the burgeoning independence moves in Scotland and divisions between the North and South in Belgium and Italy to show that stupidity and intolerance are a worldwide commodity.
Yet again our political masters have put out the begging bowl for the nations of Africa and the heart strings have been tugged by TV pictures of the staving and the disposed in that benighted continent. The problem is that, by now, the average citizen in Europe will have lived his whole life with exactly the same pictures appearing with monotonous regularity on the little black box in the corner of their living room. ‘Forgiving Debt’, ‘doling out charity’ and ‘directed investment’ seems to make no difference in the long run as the party (or individual) in power merely expropriates any wealth created and diverts Billions (and yes, this is not an exaggeration) into personal bank accounts across the globe. If the world does sink into a recession the problems will get worse as hard pressed governments will be tempted to go down the South American route and just expropriate foreign company assets. All those lovely mining contracts may end up being just pretty pieces of paper (rather like those glass framed, turn of the century, Railway Bonds that adorn many a wall in the city). Zimbabwe, Venezuela and Bolivia are possibly a foretaste of what might happen to the mining and oil companies hard won exploration and extraction rights across the globe if a US recession does take hold.
Yesterday’s price action really took the biscuit with the FTSE originally expected to come in some 120 points lower actually opening just 30 off then proceeding to fall throughout the day to a low of 170 down. With just 90 minutes of trading left dealers finally decided that enough was enough and a big closing rally took us over 120 points off the lows before expiring breathlessly just 80 off on the day.
This type of volatility creates its own fear of participation as even a small toe dipped into the water can turn into a hefty liability in a surprisingly short period of time.
With the American and Far East markets all back on the front foot (again) the opening quote for the FTSE is once more wildly at odds with yesterdays close. The Spread Betting companies are seeing an opening rally of 45 points with a FTSE 100 spread at around 5832-5833. Normally the opening calls are pretty accurate as pre-market stock levels can be estimated with reasonable precision. However yesterday’s 100 point miscalculation probably cost some bookies dear as punters will often bet against any dramatic moves. They will have bought in the pre-market action.
For the FTSE 100, a close above 5815 (and preferably above 5920) will give many technical traders the confidence to get involved once more. Nevertheless the temptation to just sit out the current crazy conditions may keep the big investors on the side lines.
FX markets are pretty moribund this morning with the Pound / Dollar cross consolidating above $1.9800 before a possible attempt to regain the $2 mark once more. The trends are still not very Sterling friendly but the bears appear to have run out of breathe for the time being and this is giving the bulls a bit of a run.
The EUR/GBP cross remains stubbornly close to 0.7500 which will be giving our exporters a bit of a boost whilst at the same time constraining personal expenditure to some extent. If we can remain around here for some little time it will give hope that any inflationary pressures will be of the ‘one off’ variety.
The Gold markets hit new highs yesterday as the bulls continue to fill their boots. The Financial Spreads Account holders continue to buy on anything approaching weakness and the recent fall down to $850 seems to have been the shake out that was required to give momentum for the next push higher.
Bulls remain fixated on the El-Dorado of $1000. However as the Crude Oil Traders found in 2006, the ‘almost attainable’ $100 level may take a little longer than expected. Today we are calling the Gold spread at $924.0-$924.5 off a touch overnight but there is not much activity in early trade.
Spread Trading, 28 Jan 08
And so, the madness begins again.
The Far East markets have managed to neatly reverse Friday’s huge rally with almost identical falls this morning as the Nikkei Spread comes in over 500 lower and the Hang Seng another, astounding, plus 1000 point day, only this time to the down side.
Recession based fears in Japan seem to have been the trigger this time as Tokyo stock volatility hits a ten year high.
Whilst all this is going on the ‘great and the good’ return from their sojourn in Davos where top financiers and leading politicians rub shoulders in an orgy of ‘sack cloth and ashes’ pronouncements, guaranteed to get sympathetic air time on domestic Prime Time TV. The, pious, pomposity of the missives trotted out to a credulous electorate are beginning to get a trifle nauseous. The whole event looks increasingly like a kind of university milk run where, just in case things in the current job go arse over tit, cv’s are circulated for future Directorships and possible UN quangos. Only in the fantasy world of Politics could anyone seriously listen to Tony Blair on financial matters. But then this is the same group of people who placed him in the role of Middle Eastern peacemaker! Talk about putting the lunatics in charge of the asylum. I am petty sure that if you just made a repeat of last years circus that very few would notice the difference.
Lots of wringing of hands over Africa. Prophets of Doom over global warming (somehow stop the Chinese building a new coal fired power station EVERY SINGLE WEEK). Fears over world economic situation (again) blah blah blah.
I remember an investment manager in the days of my youth who said to me “watch out for CEO’s (in those pre ‘non-exec’ days it was Chairmen) who spend too long at CBI lunches and sell their stock, they obviously have other fish to fry” or words to that effect. For ‘CBI’ read ‘Davos’.
Amidst all this the MPC continues to fight the last war as they anguish over inflation. Sorry guys but we are in a different game now. Counting the number of deck chairs on the Titanic may be of interest but is hardly useful.
This morning the FTSE Spread is being called 115 points lower at around 5750 as the Dax futures are trading 190 off in pre-market action. As I have said many times in the past few months it is a brave man who gets involved in the current environment. Keep your tin hat on and your head down. There is much being written about the unheard of value in the markets at the moment with many stocks at rock bottom prices but this all rather depends on retention of last years profits and dividends. If a few companies break ranks and cut the divvy yield then many could follow citing other company precedents.
The FX markets have been very busy overnight with the Pound tracing a huge 300 pip range already against the Yen as the currency traders get in an early start. But now aside from some Yen strength and Sterling weakness there is little change on Friday’s closing levels as dealers have second thoughts on direction.
The USD / JPY market does not look happy above 107.25 but on the other end is struggling to hold below 106.00. This is making for some solid trading opportunities in recent days as punters play the ranges.
For Cable the battle since the bounce from the $1.9340 lows seems to have run out of steam at $1.9815 the support level from last August. We may see some solid selling here. If we can close above this mark then the bulls could well be back in play with the obvious $2.00 level the target.
Gold is higher again today as investors pile in once more on other asset weakness. The candlestick charts show a nice little ‘Doji’ on Friday which is often taken as either a Neutral or a Reversal signal by chartists so we may find some profit taking in early action today. The Gold Spread is $918.8-$919.3 up a couple of dollars but we are seeing very little activity from Capital Spreads Accounts.
Spread Trading, 25 Jan 08
Two huge pieces of news will dominate dealers minds today. The first being the incredible €5 billion loss created and hidden away by Jerome Kerviel and the second the $150 Billion stimulus package voted in by the US Senate.
Taken in order, the more you consider the extent of the fraud the more questions are raised. If we assume that the trader lost 10% of the absolute risk on the stock futures (and that is assuming he took the entire position at pretty much at the top of the market) then we are looking at total exposure of some €50bn. The bank has said that the contracts were in plain vanilla derivatives (generally this means a ratio of 1:1 risk). That means the dealer somehow managed to get the confirmations for the deals directed to him personally and not to the Soc Gen back office. We can assume that an audit team, as is normal practice, requested a list of open deals from a counterparty bank and discovered that the counterparty had a series of deals which were not represented on the Soc Gen books.
The statement from the bank that the risk had been sold off already might, to some extent, explain the extra-ordinary market action on Monday and Tuesday when in just two trading sessions the Dax dropped almost 1000 points (far more than any other index). Dax trading remains 500 points below the close last Friday whilst the FTSE is almost unchanged and the Cac only off a couple of hundred. The bank may have to answer questions about creating an artificial market as dealers who lost substantial sums over the period might feel rather aggrieved.
The second story is the $150bn package approved in the US overnight. The Asian markets have responded dramatically with massive rallies across the board to go with the huge moves higher on Wednesday and Thursday. The relief in the Far East is understandable as their economies are heavily reliant on US economic growth sucking in imports. The obvious problem is that the US is already suffering from a massive trade deficit and this package is likely to make it even worse. Naturally the dollar has taken it on the chin as traders, who will understand the Fed rate easing as the natural order of things, tend to shy away from anything that smacks of just printing more money.
Whether the package will work will depend on the reaction of the US consumer to being given more money. Those with savings will probably just save more and those who spend what they earn will, presumably, just spend this as well. The US does rely on its citizens saving for their own future so we may find that this largesse may be less effective in stimulating growth than previous ones.
The European and US markets are being called higher this morning and the early indications on the FTSE are for a regaining of the 5900 level with FTSE 100 Spread at 5930-5931 being quoted to pre-market dealers. In all the turmoil of recent days and weeks it may come as some surprise to remember that the Bank of England, the ECB and the various European Governments have done absolutely nothing. Zip. Nada. Of course the Europeans do not look on the Stock markets in quite the same way as the Americans. For some reason we disassociate ourselves from the impact of under performing assets as being ‘nothing to do with me’. The Amercians, due to the personal nature of their savings culture, are very well aware of effect of falling share prices and the negative impact it has on their portfolios and their future well-being. A bear market is tantamount to Un-American behavior and the US politicians are well aware that their constituents demand swift responses to difficult times.
There are no corporate announcements today (of note) and absolutely no economic data releases from Europe, the UK or the States so it would be wise for day traders to watch the volume trends for indications of immediate direction. This week will go down as one of the strangest in financial history but as we look across the landscape (aside from the Dax) we can see that a one week Rip Van Winkle would not even notice much movement across virtually every asset class.
Gold is sharply higher as the dollar weakness has played in the bulls favour and the recent weakness which took prices as low as $850 on Tuesday now seems to have played itself out. Punters remain very strong buyers as they have been throughout the falls and they are being rewarded with nice little gains this morning. The early call is for the spot gold spread to come in at $912.0-$912.5.
With the renewed confidence in world growth Oil has spiked higher again and Bent is now hovering just under the $90 level with a Crude Oil spread at $89.35-$89.40. Trading seems very two way at the moment with bulls and bears fighting it out. The US stimulus package may have a nasty little sting in its tail on the inflation front but if you ask people if they would rather have a job and a bit of inflation or no job but happy Central Bankers I am pretty sure what the answer would be.
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Spread Trading, 24 Jan 08
After the one way traffic that was the American markets last night what can the rest of the world do but follow suit.
The huge volatility of recent days gives some indication of the low level of market maker books going into each opening session. As investors scramble to get in on the extreme falls or rallies the brokers are having to frantically dump or chase after stock themselves.
The sense of unreality has continued with the French Bank Societe Generale announcing that one of their dealers had committed the bank to positions that were now losing over 5 billion euros (that is 5,000,000,000 Euros). Even Nick Leeson cannot claim that level of hidden risk. The stock will no doubt plummet this morning but will probably also drag down others shares in the sector as investors worry about contagion.
After all of the compliance rulings over risk controls etc etc over the past 10 years or so the capability of just one trader to circumvent the banks middle office monitors to this extent seems almost unbelievable. We can expect some very serious head to roll. It should give the great and the good in Davos something to talk about.
Turning to the growth numbers out of the UK yesterday and I must say am I the only one that sees something amiss. Surely growth of 2.5% annualised should show up in the tax receipts of HMG. But the data released last week showed that funds flowing in to the tax mans coffers were substantially below expectations and that the Government deficit was much bigger to the end of December than even the bears had forecast.
The simple answer is probably that the only reason for the growth numbers is the Governments own spending. As the private sector suffers under ever greater Tax demands 'Our Gordon' compounds the problem by spending ever greater sums on parts of the economy that will just suck the money in like a sponge and show very little return. A prime example of this is one of the Labour party’s proudest boasts, namely that they have increased NHS funding by 300% in the past 10 years. Does anybody reading this comment really believe that the service is three times better than it was? At some point a government is going to have to grasp the nettle and start to do what France, Germany, Ireland etc do and charge people to see State doctors and also charge a market rate for prescriptions.
Today we have very little data out with which to get our teeth into but this will not matter because the opening levels of all the indices are going to be so violent that the ripples will probably last all day and into next month.
The FTSE 100 Spread is called 170 points higher but this is as much a guess as anything and the opening could be quite exciting. Traders should consider though that bear markets tend to last rather longer than a week or two so don’t be surprised if at some time in the next week or so that the effects of the Fed's 0.75% rate cut start to wear off. The temptation to have a rush at getting back above 5800 will probably interest dealers early on but resistance is waiting just above here between 5805 and 5830 which may take a bit of a battle to get through.
Punters will be wondering whether the US rally will continue into a second day and we can see quite a few shorts being set up as clients look for a reverse reaction. It is a brave man who gets involved in today’s markets in anything other than token amounts. Quite respectable profits and losses can be made in just a couple of minutes with the smallest of punts.
Forex Markets are almost unchanged this morning with the Pound just a little weaker across the board and the Yen the Strongest of the majors. We have been oscillating around the current levels for a few days now as the interest has shifted to the equity markets. The drop in US rates has yet to make much of an impact. That gives an indication that FX markets expect at least another move from the other Central Banks.
Oddly enough Gold, which has spent the last month whirling all over the place, has begun to settle down a bit and is still hovering around the $890 level having tried a move to both the up and down side yesterday. It might not seem like it but there have been periods over the past year when not much actually happened for some time and with both the bulls and the bears seemingly a bit tired we may be entering one such time.
For punters who got long of stock yesterday this morning will be a very happy one. However the advice must be (for a change, as professionals normally say run your good bets) to make sure that any profits do not drain away in a return to the lows.
Spread Trading, 23 Jan 08
After yesterday's extraordinary events there will doubtless be no end to the surprises for stock markets throughout 2008. For the second time in 6 months the Federal Reserve has acted decisively to cut interest rates before their official meeting (which takes place next Wednesday). Despite the relief rally there are many who believe that yesterday's action just smacks of panic and we're sat here wondering will it really have made much difference if they'd waited until next week. Yes they may have prevented a complete global meltdown of equity prices, but if they'd cut by 3/4% at their official meeting, there would almost certainly have been a relief rally then just as there was yesterday. Our man, Mervyn King, continues to try and show his vigilance in the face of inflation even though he spends most of his time reminding us that 2008 will be the toughest year the UK has faced in a decade. With the likelihood of a recession ever increasing this should be enough to persuade our rate setters here that it is time for a similar move in interest rates. The market is still expecting only a 1/4 % fall to 5.25% and we will see in the latter part of this year who was right. Who is the irresponsible one? The tenacious American who risked the possibility of stagflation in order to reignite growth or the cautious Brit who tackled inflation at the expense of lowering borrowing costs and the economy?
Today’s Bank of England minutes will be closely watched to see what extent can we expect a cut in interest rates next month. The only good news for those homeowners praying for a bigger move to 5% will be if more than 2 people voted for a cut last month, when the committee kept rate on hold. UK Q4 GDP figures are also released at 9.30am with quarterly growth expected to ease down from 0.7% to 0.6% and from 3.3% to 2.9% on the year.
The market is looking better this morning as Asian markets also staged a relief rally. The FTSE is being called to open 20 points higher. Since we crashed through the 6000 level it may not act as a tough resistance barrier and we could be back up there by the end of the week, especially if the banking sector sees the sort of buying we saw yesterday. Clients are largely long the FTSE, albeit in the shorter term contracts, so perhaps they expect a run back to the highs set in 2007 to be still a long way off.
Unsurprisingly, after the US rate cut, the dollar took a bit of a pounding yesterday (no pun intended). However it is fairing better this morning and there is increasing belief that the demise of the dollar could be over with a "double top" looking to have formed in the Euro / Dollar market.
Gold traders staged a huge recovery yesterday (as if you can call it recovery) and the price of the metal seems to have largely uncoupled itself from the US dollar with an asserted effort to head back above the $900 mark in Asian trade. It’s currently lower at $889.
Crude Oil prices remain depressed (to the extent that they are still only in the high $80s rather than the $90s). Capital Spreads Account holders have found these levels comfortable enough to take out new long positions expecting a possible attempt at the $100 level in the coming weeks. With inventory data out at 15h30 today, the oil markets will be closely watched.
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Spread Trading, 22 Jan 08
After the chaos of yesterday, cue the chaos of today.
Early calls are for the FTSE 100 to open over 100 points lower again as the Far East joins in the rout. My comments of a few days ago stating that we needed to hit 5410 for an ‘official’ bear market to be announced were meant as a bit of tongue in cheek but it seems that the markets are in a hurry to be miserable.
The Americans will now have the completely unprecedented occurrence of walking in to their own stock market more than 6% down outside of their time zone. When I use the term unprecedented that is exactly what I mean. The Dow Jones spread is called 650 points lower at 11425-11429 and the S&P 500 has gone straight through the 1300 level and is called to come in around the 1250 level.
In these markets it is wise to remind dealers that the best policy is to do nothing. Sit on your hands and resist the temptation to get involved. For investors there may be opportunities to pick up very distressed stock but the problem is on what basis is it distressed. If we look at last years earnings/dividends to project yield then we may be in for a shock if corporate earnings take a dive. Some analysts reckon we are at unheard of value levels and other that we are still too expensive. Which do we follow?
The FTSE 100 spread is called (as I write) at 5438-5439 off 140 points but by the time this goes to print this will in all probability be very wide of the mark. We can expect (as with yesterday) that there will be a large number of forced sellers on the open especially when looking at the highly geared dealers. CFD holders are especially vulnerable as with a rolling margin situation it is unlikely that all will be able to come up with large sums of cash on a moments notice. Brokers will close out positions in a very weak market which will force prices down initially. At some point, this morning, the ‘forced’ selling will abate and then dealers will start to re-evaluate value levels.
Whether we were entering a recession or not, now seems to be a moot point as, the collective destruction of wealth over the past few weeks will almost certainly proscribe new corporate spending and to a certain extend consumer demand. These markets falls are very likely to create the very environment that we were fearful of.
Forex Markets are again being nasty to the pound as we now drift ever lower on the trade weighted index. The GBP / USD Spread is now at $1.9351-$1.9354 after the support mentioned yesterday at 1.9475 failed to hold. Bears will be looking for the move down into the 1.9100’s indicated by the supports failure. One of the problems for the major currencies is where is the value. In times past tough market made for a flight to the Dollar and Swiss Franc. Whilst this is still the knee-jerk reaction the Greenback has it own problems right now.
Gold Trading Prices are also tumbling and Gold is now called at $850 some $70 off from the highs. Dealers continue to try to buy into the weakness but as mentioned several times the Gold market can fall a long, long way and still be in a bull trend.
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Spread Trading, 21 Jan 08
Difficult to know what to talk about this morning as the weight of comment over the weekend seems to a) covered virtually every economic topic b) covered it from every angle.
The ongoing woes in the financial sector need little additions from me aside from the rather bleak outlook concerning the insurers of all that ‘AAA’ rated collateralised debt. There appears to have been a rather significant flaw in the risk models of these instruments which may make Northern Rock’s miscalculation over the liquidity of the money markets look like very small beer indeed. In the long run this is a much more serious problem and one that seems to be an obvious failing even to a complete numpty like myself. Senior managers of investment banks must have either been looking the other way when these products were placed on their books or willfully took the risk in the ever more desperate search for returns to try to match ‘Goldman Sachs’.
Added to this has been the problem for many companies of the curse of the ‘active investor’ groups. If a scapegoat is being hunted we might look no further than these “quick buck” merchants who have beaten every good, but cautious, board over the head with the stick of financial engineering. I have no problem with investors taking quick profits, that is their right, but the idea that a Fund with billions behind it can just turn up, buy a small minority stake, and then start dictating to the Directors, generally in terms of company ‘break-ups’, job losses, or massive increases in debt levels. When the dust settles the company is invariably hamstrung to such an extent that the stock slumps.
Over the past few days the markets have generally opened on a positive note as small investor demand has come in on the buy side. This has had the effect, in the absence of any major player involvement of forcing the market higher on low volumes. Market Makers have seen the direction the wind is blowing and have jacked up prices in the morning sessions on buying size that would normally leave quotes pretty much unchanged. As we move into the afternoon prices have fallen back on even lower quantities leaving the buyers high and dry. Of course for the smaller investor looking for returns it does not really matter so long as the dividends are maintained (we hope) but for the big boys they will need a good signal that the current weakness is ending before dipping a toe in the water.
The FTSE 100 Spread is being called 75 points off this morning at 5825-5826 which is pretty fierce stuff even these days and is perilously close to the 5815 low back in August and last Thursday. On both occasions the market reacted with a violent bounce but the fear is that this time it is of the ‘dead cat’ variety. The more you look at the long term charts the more they appear to show a ‘double-top’ formation from June and October last year and if this is what the big investors are watching then we could be in for some rather more serious falls ahead. Unfortunately the lower the market goes the less well covered companies debt becomes, the tougher their bank borrowing lines become, the worse their margins become etc. in a sort of gruesome cycle until it all goes too far and snaps back. It has been said before and will be said again but this is definitely a time where ‘cash is king’. All in all it does not look like being a good open this morning and we can expect some forced selling on the off.
Sports Direct, that nice little company funding King Kev’s return to football management, have reaffirmed their profit target for the year which should hold their price firm this morning but they have stated the oft mentioned line beloved of retailers that they are ‘expecting the trading environment to become increasingly difficult”.
FX markets are moving in the Yen’s and, to a lesser degree, the Dollar’s favour this morning with the Euro giving back more of it’s recent gains. The Pound is just giving up. The USD / GBP rate is now back down at the 1.9500 region with the current spread at $1.9507-$1.9510 off some 50 pips overnight. The weakness of Sterling has been accelerating since the middle of December as the reasons for holding the currency have slowly drained away. However the $1.9475 to $1.9500 support has held over the last few weeks. Today sees another attack and if we close below 1.9475 bears will be looking at the 2007 lows of $1.9184 as the next target.
The Yen has now reached its highs versus the dollar for two years and is quite close to the long term trend support at around 102.00. The Yen / Dollar cross has not been below 101.00 for over 10 years and if we approach this level we can expect a monumental battle.
On the commodity front the weekend Dollar strength has brought out the sellers and Gold is down at $876.6-$877.1 off 4 bucks in early trade. Copper trading has also come in for some selling in the Far East as fears over growth weigh on future demand curves.
With Crude Oil beginning to slip we might expect some breaking of ranks in OPEC as producers try to sell as much of the black stuff at these high prices as possible. In the final account there is not much love lost or agreement between the Oil producing nations (apart from a general dislike of the US). So unless there is some increased political tension traders are beginning to put a toe into the sell side for a change.
For the latest spread trading update from Simon Denham click here.
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