Financial Markets Drama Continues as Eurozone Falls into Recession
Stock-Markets / Global Stock Markets Nov 17, 2008 - 08:04 AM GMT
World stock markets took another tumble last week with the major US indices
penetrating the October lows intraday. The FTSE finished the week down around
4%, but it was UK plc that took a battering. The Pound fell to record lows
against the European single currency, even breaking through the synthetic
Euro/ Deutsche Mark lows from 1996.The week's action was all the more damning
considering the Eurozone's admission that it too is in a recession. The Euro
managed to end the slightly down against the dollar, but the pound plunged
through the 1.5000 level for the first time since 2002. However there is
still some way to go before the low of 1.3685 from 2001 is breached.
Financials were amongst the worst performing companies as Libor broke its 23 day decline. 3 month Libor increased to 2.15% and overnight Libor also pushed higher. The main catalyst was Paulson's announcements of changes to the Troubled Asset Relief Program. As this originally was seen as getting to the heart of the matter in terms of offloading toxic assets, investors are confused as to what this means for future prospects for financial firms in the US. In the US, the insurance giant AIG had its earnings estimates cut, as did Wells Fargo. Much worse are the rumours that Fannie May may have to tap into US government cash to avoid liquidation.
Previously unaffected stocks
such as HSBC were also down hard after poor results, and there was
speculation that it too may need to follow Santander's lead in raising money
through a rights issue. Until very recently HSBC and Santander were seen as
being at arm's length to the current crisis due to their relatively low
exposure to the US housing market. However, with news of the UK property
crash worsening and Asian markets faltering, HSBC is coming under increasing
pressure.
More than anything market participants hate confusion or indecision, with the
common reaction being "if in doubt, get out". This is reflected in the
performance of financial shares across the globe. Even when the wider market
attempted a rally, financials were weighing on sentiment, like a ship trying
to sail with its anchor still deployed.
Although last week's UK unemployment data and sales projections from various
companies fell below consensus, European markets didn't revisit the October
lows and US markets managed to rally from beneath them . Despite the economic
outlook arguably looking bleaker than it did just two weeks ago, markets
haven't capitulated. The optimistic interpretation of this scenario is that
the bad news is starting to be priced in by the stock market. As markets are
forward looking by at least 6 months, they could be discounting the slowdown
that virtually everyone is predicting, and are looking for what happens after
that.
The pessimistic interpretation of the current scenario is that markets are as
over optimistic now as they were a couple of months ago. The default reaction
to any impending disaster is in most cases denial then panic. The pessimist
would argue that investors are still too optimistic about company's future
growth prospects, and so further falls are likely. The reality is that
markets are flipping from optimism to pessimism almost by the hour and remain
entrenched in a choppy mess. After repeated failed rallies over the last few
weeks, the bulls would be forgiven for giving up the ghost.
The coming week kicks off with some middle tier US industrial production
figures and Treasury secretary speaking late on Monday evening. On Tuesday
there is a raft of UK and US inflation numbers followed by Fed chairman
Bernanke testifying as US markets open. Wednesday sees the release of the
last MPC meeting minutes and with Gordon Brown calling for further rate cuts,
these minutes will be poured over closely for hints of future decisions.
Later that evening the FOMC release the minutes from their last meeting and
although many argue they are done for now, Wall Street is still calling for
more cuts.
There have been many comparisons between current market action and the great
depression of the 1930s, and in many ways these comparisons are valid. The
last time markets were as choppy as they are today was indeed the 1930s. The
world is a very different place to how it was 70-80 years ago, but the
current extremes we're seeing point back to this period as being a strong
likeness. According to Rob Hannah of Quantifiable Edges, the stock market
only recovered from this decade long malaise, once it switched from chop mode
to trending mode. If a long period of chop is the worst we experience over
the next few months, even years, although frustrating, there may be worse
things that could happen. Ironically, a smooth decline which bottoms out to
form a smooth rally may be the real harbinger of a recovery. This may be a
moot point as we are still far from seeing smooth rallies or smooth declines.
Potentially more positive signs were pointed out by Jason Goepfert of
SentimentTrader, who noted that until this week the S&P 500 has never swung
up 5% one day then 4% down the next. This has happened three times on the Dow
Jones, all dates between 1929 and 1932. None of them marked a low, but were
within a week or so of one. Barry Rithholtz also noted that market bottoms
are rarely completed without multiple retests of prior lows. This is arguably
what we were seeing last week. While there is considerable risk of further
selling, at least with fixed odds trading our risk is limited to our stake.
Therefore a Bull bet, which predicts that the market will be higher than a
certain level in the future could offer an attractive risk reward. A bull bet
predicting that the Dow Jones (Wall Street) will be higher than 9000 in 9
days time could return 187 at BetOnMarkets.
By Mike Wright
Tel: +448003762737
Email: editor@my.regentmarkets.com
Url: Betonmarkets.com & Betonmarkets.co.uk
About Regent Markets Group: Regent Markets is the world's leading fixed odds financial trading group. Through its main multi-awarding winning websites, BetOnMarkets.com and BetOnMarkets.co.uk, it has established itself as the leading global provider of a unique, powerful way to trade the world's major financial markets. The number, length and variety of trades available to our clients exists nowhere else in the world. editor@my.regentmarkets.com Tel (+44) 08000 326 279
Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.
Regent Markets Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.