Whilst the riots around the UK look to have dissipated the markets have not seen the end to their chaos as yet another sea of red covered traders’ screens yesterday.
The Dow gave back most of Tuesday’s gains and so the big bargain hunt was proved to be short lived, with the great bullish “hammer” that was formed seemingly ending up being a false signal. Fear is still gripping investors as the prospect of slower global growth keeps the bears firmly in control of proceedings.
Needless to say many people are blaming spivvy short sellers for the recent crash, but if you are a rational investor and you are concerned about the situation of French or German banks, then you are going to sell, sell, sell. Even if you don’t own the underlying stock somewhere along the line you’re probably exposed to UK banks and so why shouldn’t you be allowed to short a stock?
However, the FTSE this morning is perkier again as Asian stock markets didn’t follow through with a sell off following the big move lower in the Dow and many people believe that if you buy now, you should be in good shape come year end. At the open the FTSE is up by some 90 points around the 5100 area.
Caution lingers though, as volatility remains at well above average levels and the major moves in the indices are a characteristic of markets following such a substantial move to the downside. The FTSE has been jumping in 20, 30, 40 point leaps regularly making trading conditions exceptionally exciting, but at the same time exceptionally dangerous. As I often say in this comment during these sort of market conditions the best trading strategy might be simply to sit on your hands.
In the UK the outlook is particularly gloomy after the Governor of the Bank of England downgraded UK GDP forecasts and reiterated that inflation could peak at 5%, the thought of which is enough to make anyone want to partake in a little bit of rioting. One thing is for certain and that’s that interest rates in the UK will remain low for some considerable time to come meaning savers will simply have to hope that inflation will come down on its own accord as they know they’re not going to get any help from the BOE.
Slower growth, higher inflation, it’s something we’ve been discussing throughout 2011 and it’s only in the past couple of weeks that the financial markets have taken note. Many indices are already in their so called bear market classified by a 20% fall from the highs, in particular the German Dax which is 24% down now, but for now the Dow and FTSE are yet to fall into that category. However, they are worryingly close and it might only be a matter of time before they too succumb to the bears' claws. For this morning though the bulls haven’t quite given up the fight yet.
The strength in equities is equating to dollar weakness across the board with EUR/USD and GBP/USD being bid higher. The Aussie too is seeing a nice bounce having been under pressure of late. AUD/USD is at 1.0285 having recovered from parity on Tuesday. The dollar remains the whipping boy and USD/JPY is only a few ticks above is fifteen year low at 76.50, but interestingly it is just about holding its own against the Swissy , just above the recent lows at 0.7290.
Is gold lower this morning? It can’t be. Well believe it or not it is, but by nothing serious in the scheme of things. Off 10 bucks to 1784 but having marked a new all time high above 1800 late last night. The uptrend is still firmly intact but the higher gold goes the more it looks like a chart that is forming a huge spike and such charts can often see a big move in the opposite direction. We’ll have to wait and see if gold is the next big bubble.