We end the week a very sour note.
Stock markets have plunged and investors are rushing for the exit. It seems that nothing is safe except for the good old US dollar. When you get moves like that you know that risk aversion is at the forefront of investors’ minds. The losses incurred by equity investors in the space of just 48 hours are scary and comparisons are being made to the 2008 crash. When you look at the daily chart of the Dow the moves of the past few months are eerily reminiscent of the period between May and August 2008. There was the initial sell off before markets had a bounce, and then Lehman hit which sent everything south very quickly. This time we’ve had a similar initial sell off and bounce, so have the losses of the last few days been the precursor to the next large leg lower? If so, 10,000 could be on our screens quicker than you think.
A combination of things compounded yesterday’s sell off, which started with Ben Bernanke’s bearish outlook for the US economy and then economic data from around the world disappointed with worse than expected manufacturing data being a recurring theme. When risk assets (and that includes gold) start to plummet like this then people are called up for margin and many have to liquidate their long positions, further adding to the selling pressure. Even more worryingly for some European investors, the French Cac breached its recent lows and is now only a couple of hundred points above its March 2009 low. That’s two and a half years of bull market wiped out in a month and a half – scary stuff.
It’s at times like these that the level headed and rational thinking investors put to one side all the noise and underlying risks and boldly start buying stock after such hefty losses. The problem is that it really does take a brave investor to buy after such a sharp retracement, particularly when most other people would tell you that you’re mad. Even contrarian investors would be having second thoughts at times like these.
This morning the FTSE is seeing a little bit of a relief rallying up some 40 points to 5080 in answer to promises from politicians that they will address the current crisis. Sounds familiar? Well nothing can be expected from this week end’s meeting of the G20 so the little bounce we see early on could be very short lived. That said with no economic data for the rest of the day, the mass sell off we’ve seen in the last couple of days could well attract those bold buyers mentioned above.
The major support for the FTSE is 5000 which as yet is a level that the index hasn’t closed below, although it has had a 200 point move below it intraday. Below 5000 is 4940 and then 4800. Resistance is seen at 5150 and 5220 with of course the big level at 5400.
As mentioned economic data has dried up for this week. The only thing we have seen released today has been French business and consumer confidence. These have come in slightly lower than expected which investors are becoming rather used to now.
The US dollar has been the one to benefit from all this turmoil and has risen some 8% against it’s basket of other currencies. This is a big move for the greenback and is one that has got investors across the world sitting up and taking note. This morning though the dollar is giving back a few of the gains in line with the bounce in equities, so the likes of cable is up some 80 pips to 1.5425 and EUR/USD is 60 points to the good at 1.3530.
Gold has managed to hold onto the 1700 as bulls continue to get a little nervy about the precious metal’s recent weakness. This morning it too is seeing a little bounce to 1747. In line with gold crude prices are also seeing a little strength up 60 points to 106.00 following its substantial falls yesterday. For the bulls of Brent the fear is that like its cousin Nymex we could see the price test the psychological $100 level soon.