Markets reacted violently to the announcement of some $300bln bond purchases by the US Treasury at around 1800 UK time with the Dow rallying 200 points, the dollar slumping over 4 eurocents and Gold spiking over 50 dollars from the trading lows. Oh, and the US Long Bond rallied 700 pips at one point. Not the biggest ever one day range as it had a twelve point high/low back in Oct 1987 but still a respectable second place.
Even by the standards of the last 18 months yesterdays evening session was spectacular.
Punters were looking a tad sick before this event as most were still long indices, sterling/dollar and Gold all of which were suffering through the day to this moment. I expect that there were a few champagne bottles popped by clients in relief if nothing else.
For all of the big moves in the Dow and S&P yesterday the other major indices seem quite unenthusiastic with the FTSE called at 3845 in early trade just 40 pips up on yesterdays close and still 70 points below the highs of yesterday morning. The Far East seems even less impressed with the Nikkei closing off 26 pips and the Hang Seng down 95 (0.75pc). The world wide effect of such a move has been correctly analysed by investors. Printing Dollars reduces the value of the greenback but increases the actual numeral cost of any dollar priced asset.
The markets this morning seem to be hovering in indecision as to whether the US move will prove effective or counter productive. There is a certain amount of fear that the move was slightly forced by the fact that liquidity in the money markets is starting to dry up again (much as it did in the middle of 2008). The Base Rate/Libor spread has been widening little by little through the last couple of months, not enough each day to alert the press but enough to worry the Central Bankers. Of course, now that the BOE and the Fed have made this move all eyes will be on the ECB for signs of a similar action. The problem for the ECB is that there are a myriad of regulatory restrictions which impede its freedom of action. The rules set up on the launch of the Euro did not allow for the type of crisis that we now find ourselves in and the ECB may now have to stretch some of the definitions of its remit to gain some room for manoeuvre. The problem here is that the German public may not just sit quiet whilst their half century long pre-eminence is put at risk to prop up more profligate nations.
In reality $300 bln (those numbers just roll off the tongue these days) does not actually add up to a huge injection in overall terms, although it is probably a harbinger of more to come, so the likelihood might be that after the initial impact we will just slip back to where we were before it all started. The $1.45 Trillion mortgage debt purchases will also free up considerable liquidity but it is more of the fact that the Fed is there as a last resort that is important. US Housing numbers have finally started to bottom out and much of the write downs will be clawed back as the vast majority of US home owners continue to pay their mortgages on time. Fed purchases at this moment will probably be at very favourable prices and may well turn into federal profits rather than tax payer liabilities.
Our clients continue to oppose major directional moves so they will be hoping for pull backs from the recent rally after taking profits in yesterday’s chaos and reversing out. To be honest the normal rules over running profits and cutting losses seem to be out the window these days as we trade and re-trade over the same old ranges day after day.
One of the bright sparks at the moment is that banking stocks seem to have finally hit levels that are just too attractive to miss. Barclays is back up to 100p this morning after the latest analyst and rumour based falls peter out. There has been considerable concern at the continued snipping at Barclays over their debt valuations as one has to assume that the company has proved to both their auditors and the FSA that their numbers are true and fair. HSBC are still low by historical standards but, at 429p, are still 40pc above their lows of the 9th March.
The Dow and S&P both managed to get above medium term resistance and are remaining above them (albeit rather uncomfortably) this morning (the Nikkei managed to break its downward spiral back on the 10th). The problem here is that the FTSE, CAC and Dax are still very much on the back foot and remain in negative territory. If the FTSE can close above 3960 or the Dax above 4210 then the majority will be at least above the, seemingly, never ending downward trend.
On the currency front the major influences now appear to be the various central bank injections into the financial systems. While this will have short term implications the very long term view should be neutral (assuming it works!) but traders will continue to be wary of what many consider to be voodoo economics.
Click here to go to Capital Spreads
Simon Denham is Director of London Capital Group and Capital Spreads. We do not endorse the information and analysis available in this comment and it is provided purely for information purposes only and is delivered as a personal view by the writer. Under no circumstances is the information in this comment to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. The investments referred to herein may not be suitable investments for all persons accessing this page. You should carefully consider whether all or any of these are suitable investments for you and if in any doubt consult an independent adviser. We accept no liability whatsoever for any direct or consequential loss arising from use of the information on this web page. Please see our Terms and Conditions.