Capital Spreads MD Simon Dehham contributes a daily market commentary

Forgive me for being slightly smug but my comment on Friday morning wondering why the markets had not fallen that week on the frankly very grim US data was bourne out by the trading activity. A fall of almost 400 points in the Dow is being followed up with an 80 plus point drop this morning as confidence drains away.

The curse of October seems to be striking again and investors can hardly claim they were not warned, coupled with the rather extreme recovery move after the August sell off punters have had an almost perfect trading environment.

The FTSE is being called to open over 100 points lower this morning at around 6420-2621 which is still pretty close to the end of September closing levels of 6466 whereas the Dow and S&P are some 450 and 40 points respectively off the same days closing prices. The 6400 to 6500 range is very congested and, in what has been an exciting year to date, both levels have proved to be something of supports and resistances. With punters now trying to buy on the opening low quotes from 6414 upwards we may find that this view is taken by the main markets when they open at 08.00. Whilst the US economy is showing some strange dislocations (housing slowing/outflows of capital/weak currency against robust consumer/low unemployment/strong exports) the UK may find itself in a rather more difficult situation. The manufacturing sector has had a very good year to date but let us be honest and remember how small it now is compared to the wider economy. A slow down in the financial sector will harm the UK more than any other major nation on earth and the continued gyrations (whilst good for creating interest for spread betting companies!) do not lend themselves to good long term investment advertisements.

Fortunately for the reporting end of the market there are no major corporate anouncements this morning as it always seems a little unfair when companies have to give out interims or trading statements when the rest of the market is going bananas.

Some press over the weekend about a company called S&N being taken over (but frankly any brewer who can inflict John Smiths Smooth on an unsuspecting public and call it Bitter, who cares). There is a possiblity that there will be a referal to the Monopolies commision but this would be more of a defence play by the company itself, as the three companies involved are actaully 3,4 and 5 in europe which would not normally go to the commision, and would certainly not be in the best interests of shareholders. As mentioned here on Friday, the shares have stuck around the 750p level since the announcement and although there was a bit of buying right at the close which moved the price up to 767p, as shorts covered positions before the weekend (nobody wants to be the wrong way round if a rival bid gets announced on a Saturday!!), it is likely that we will continue to shadow this area until some more definate news is known.

Looking at the FX markets this morning clients could be forgiven for thinking that nothing much had changed but this would obscure some prett volatile markets over in Japan. gbp/jpy has had a 300 point trading range already and whilst we have bounced from 232.20 back up to the current 234.30 the short term chart looks like grim reading. Not surprisingly the bounce point of 232.20 was the kick off level for the recent pound/yen rally and the five day sell off has now just reversed the whole move.Punters will be watching the 230 to 235 trading range which constrained us for most of September. Momentum would seem to favour the downside at the moment and our clients are being cautious about getting long.

Dollar/yen managed to get as low as 113.20 before finding strong buyers and as we can see from recent lows in August and September this general level is proving something of a buying opportunity for traders. The usd/yen cross has now fallen from around 118.00 to the current 113.92-113.94 six straight down days. The perception that the US administration is shepparding a dollar devaluation is gaining ground and the announcement last week of net $80 bln sales of US assets for August has had its predictable effect on the currency. If the cross can close above 114.15 this evening then puntersmay take the view that this is just another move in the oscillation between 113.00 and 117.50 that has been going on since the August sell off. A close below 113.40 would be taken very badly and may trigger some aggressive selling.

Oddly enough Gold has not taken advantage of all the equity market chaos and dollar weakness to move higher once more. It is tempting to guess that we may be hitting the edge of the envelope at the moment. The move above 750 last week has not had the sort of follow through that many may have expected and the longer we hang around at the current levels the greater the probability of a reaction sell off. This morning sees the price down a few bucks at 761.0-761.6 for the rolling contract and we are seeing some client selling of long positions. As mentioned over the past six months our clients have been religiously long of gold (aside from the odd day or two) but we are seeing a more general closing of positions in the last three or four days. Punters are not particularly bearish (there is littel short building going on) but there seems to be a feeling of "let someone else have the next move". There is minor support at 756 and 745 and resistance at 765 and 770 (the high)