Was the big rally yesterday a signal of the end of the latest bear phase or was it just a squeeze of weak shorts? The fact that, for once, the move made light work of (admittedly weak) resistance levels in its surge higher may give hope to battered investors but it would be a fool indeed who believed that one swallow makes a summer.
There will almost certainly be some form of pull back in the next few days but traders should not be too quick to assume or rely on this. Remember the markets will move in the direction that causes the greatest pain to the greatest number of people and if too many dealers selling into the small rally might well build the conditions for another shift to the upside. As with all dealing it is advisable to pick your level (for whatever reason), stick to it, and have your stop in mind.
Citigroup’s numbers were certainly a surprise and for once a happy one. If banks across the globe can now look to the end of write offs and losses and start to plan the rebuild we may be seeing the ‘first green shoots’ after all. This may not help save companies and jobs in the short to medium term but may (and it is a very qualified ‘may’) mark the end of the constant destruction of capital wealth across the planet.
Unfortunately, just as we thought it was safe to go back into the water quite a few respected commentators are warning about the prospects of the rebirth of inflation as economies climb out of the mire. This warning is quite simply based on the massive increases in money supply as major nations start to effectively print huge sums of money. At the moment this seems a distant prospect as prices (aside from currency induced effects) remain moribund and, with consumers pulling in their horns over fears for the future, 2009 and moving into 2010 are probably not going to pressure too much. Central Banks will be walking a very thin tightrope between the Japanese ‘lost decade’ scenario and the high inflation seventies and eighties of the Southern European model. Fortunately that is an argument for a later date.
Today sees the FTSE being called almost unchanged on the open at around 3715 and the battle for some form of stability will presumably start right from the outset. It seems too easy to just assume immediate weakness but this does seem to be the most likely initial action. Punters who were heavily long at the start of yesterday have made a huge profit yesterday but have now switched round and clients are now net short going into the open. Such a small reversal is obviously not enough to call a turn but it would be a very brave investor who bet too much on such a swift return to the downside.
The Dow of course also move heavily to the upside with a 350 point reversal but (as with the FTSE) only managed to breach a few minor resistance levels (albeit quite easily) the bigger barriers remained out of reach. The obvious 7000 psychological level, 7120 and 7400 are still pipe dreams for the future.
On the currency front the pound fought off fresh early weakness to close unchanged on the day and this morning is toying with slight strength versus the Euro and Dollar but nothing to write home about. It is still difficult to believe in a serious return to sterling strength as the BOE starts the monetary printing presses. Of course the mere mention of the Bank starting to buy assets might have the desired effect without them actually doing anything much at all which would be the best of all scenarios but I will ‘dream of pipes’ another day. I must admit the policy of buying high grade debt to add liquidity is not one that I buy into with a great deal of confidence. We may well find that the BOE merely drives the price of gilts to the skies and then suffers horrendous losses when the buying pressure fades while the sellers just hold the sale proceeds in cash awaiting a more propitious time to reinvest. In this case the very real fear of devaluation by printing press raises its head but it could well be argued that this effect has actually already happened with Sterling having fallen so far in the last year. If the perception takes hold that renewed selling is not recording new lows then the market may well be lining itself up for a Sterling rally (shock, horror)
As feared in yesterday’s comment, Gold made a dash for the $900 mark breaking through and reaching 890 before recovering slightly. This morning sees a return above 900 (just) as investors make the same calculation about the yellow metal as they are making about the indices. A renewed bear move in the Dow will probably bring Gold bugs back into play. Stability or further rallies may add to selling pressure.
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