Stock Market Update 3 August 2012

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Stock Markets: 03 August 2012

The financial spread betting markets continue to oscillate as bits of information add confidence or dash hopes in almost equal measure.

It must be said that the falls seem to be getting weaker as institutional investors try to find somewhere to put the money under their control.

They will be hoping to find somewhere that will not only give some kind of return but will also look like a reasonable decision, even in hindsight, to their boards and peers.

The FTSE 100, for all of the bad news over the last few months, remains solidly within the top half of the year's trading range and is still higher than its 2011 closing price.

Corporate results have thrown up some extremes in recent weeks/months with some companies missing targets by a mile whilst others, some in the oddest sectors, have done well.

It is tempting to consider what the market might do if the news improves, given that it has remained perky whilst we face the probability of stalled growth for the next few years.

The problem with this scenario is an obvious one. If the Eurozone woes accelerate then some of the more fiscally prudent euro countries could throw caution, and money, to the wind to prop up the weaker players.

If this doesn't succeed then we may end up with the worse of all worlds, with massive sovereign debt problems across the landscape combined with imploding GDP numbers.

Rumours are being fanned by some sources in government that RBS may be nationalised, and the £2bn loss announced this morning will not have helped.

Politicians continue to be angry with the lack of lending to small and medium sized business but to be honest the banks are caught between about four rocks and hard places.

They are being urged to increase capital to secure their stability, which means less lending, whilst implementing the Basel agreements, which means that there is less capital available to lend.

If they do actually lend in the current economic environment and end up with more bad debt, the politicians will conveniently forget their urgings to lend and accuse them of casino banking.

Finally, most banks are not instruments of the Government. In fact they are companies in business to make money to pay their shareholders a return on their investment.

If they are forced into lending for the sake of lending, their share prices will suffer which will reduce their ability to issue extra capital or borrow at commercial rates. This would also cut into their ability to lend.

Of course, in good times many of those factors work in the other direction, bolstering and encouraging lending.

Currently the banking world is running around in ever decreasing circles. The fact that politicians and central banks are pouring more and more money into public sector debts is not helping.

The markets have bounced from the rather extreme events of yesterday where Mr Draghi managed to say one positive thing followed by an immediate negative.

The FTSE 100 is looking comfortable up at 5725 but traders will be mindful of the solid resistance at 5730/35, especially as we have Non-Farm Payrolls at 13:30 this afternoon.

Good numbers, or at least not bad ones, may have traders thinking about the next target of 5820/25. This was the peak back in May when the market made its abortive attempt to rally after the early April falls.

On the downside, there is quite a bit of volume support all the way down to 5600. It would be quite a surprise if even bad numbers managed to force us all the way through this.

There is short-term support at 5700/05 and further support at 5670/75 and 5625/30.

The American markets are also on a slow grind higher, with the S&P chart since Jun showing a series of higher highs and higher lows.

Investors seem confident at the moment and it seems unlikely that today's number will seriously dent this. But you never know.



Stock Markets: 02 August 2012

Well we didn't get anything new from the Fed yesterday, but the markets hadn't been expecting too much.

Ben Bernanke has been less vocal than his European counterpart about the continuing decline of economic growth.

There were plenty of words but little action was taken, the most surprising of which was the lack of extension to the guidance on policy rates for a further six months.

Such a move has raised questions over whether it is the doves or hawks who are in the ascendancy at the Fed.

The only thing that investors came away with was a reiteration of the rhetoric that they will step up to the plate if and when the economic conditions dictate.

In reality, to act now with further QE might just be seen as panicking. Spread betting investors seem to feel that if the Fed does approve QE3, it is most likely to be in September.

At that point they will have seen two more Non-Farm Payroll figures, as well as more manufacturing and services data, to help decide whether the US economy really is struggling.

Most importantly, it also gives them a chance to see what Mr Draghi meant by saying he'll ''do whatever it takes'' to improve the worsening situation in the Eurozone.

Which brings us neatly onto today. First up, we can expect more comments about how ghastly the Eurozone crisis is from the BoE, but the Bank is also expected to wait until Draghi has made his move.

After this, we will see today's main event in the form of the widely anticipated ECB meeting.

Despite the clear reminders from Germany that the ECB must not act outside of its mandate, the market will be bitterly disappointed not to see something.

Spain and Italy's borrowing costs need immediate attention, not merely now but over the longer-term. Without the bank resorting to full blown QE, it will need to come up with other measures to assist the banking system and lend to the wider economy.

Without a change to its mandate, it seems that the Eurozone crisis will be here to stay for a long time. Those who are predicting a meltdown in terms of a break-up could well be vindicated.

In the US session yesterday, the Dow Jones initially moved higher in anticipation of the Federal Reserve's policy meeting.

Investors' hopes for decisive action were boosted by weak manufacturing data in China and Europe. However, the bulls didn't get what they wanted and so profit takers came in towards the end of trading.

This late weakness hasn't affected the optimism of European investors this morning, as the likes of the FTSE and DAX are in positive territory, trading at 5730 and 6760 respectively.

Also see today's feature on Those Predicting a Eurozone Breakup Could Be Vindicated.



Stock Markets: 01 August 2012

Tonight is likely to prove disappointing for all those who are expecting QE3 which is why we've seen the Dow's rally of the past few weeks fizzle out in the last couple of sessions.

Last night the Dow Jones lost 60 points to close just above the 13,000 level, which at least for some is technical triumph for the index.

This morning European indices are flat-to-positive and it's likely that we will see traders sit on their hands until later this evening. However ahead of the Fed's announcement, there's a raft of economic data due out.

To start with there's UK and EU manufacturing PMI data. The US follows this later with their monthly ADP private payroll number which is expected to show over 100k new jobs added in July.

Also see today's feature on The ECB and Federal Reserve Play Stimulus Chess.



Stock Markets: 31 July 2012

Judging by the CBI's poor retail sales numbers, and consumer confidence data that continues to show a beaten up and depressed British consumer, things could not look more gloomy for the UK and Eurozone.

With all that the government is attempting to throw at the problem of boosting the UK economy it is falling woefully short of what is needed to get us out of the doldrums.

For the consumer, a diabolical few months of poor weather has turned just about everything into a damp squib. Not even the Diamond Jubilee has been enough to tempt us into the shops and feel better about things.

The Gfk consumer confidence data out in the early hours of this morning has put the figure in the -29 to -31 range for seven months now. Following the recent GDP data, which confirmed a triple dip recession for the UK, this is unlikely to improve things.

There might be an uplift from the Olympics but don't hold your breath. A few weeks of sporting activity is hardly the tonic required to sort out our long term economic woes.

On the continent things aren't looking much better either. Confidence and sentiment are being eroded by the dire state of affairs in the periphery which continue to be pressured into austerity measure after austerity measure.

Yes, the markets are getting excited about the prospects of fresh stimulus. There is a lot of action behind the scenes as treasury secretaries meet with central bank presidents and governors. At the same time we have political leaders saying all the right things. However, the trickle down to confidence and 'the man on the street' will not materialise for months and at least until the Eurozone crisis has been properly resolved.

A lot is expected of the ECB this Thursday. Whilst action may not be forthcoming at this meeting investors are desperate to hear more from Mario Draghi to back up his comments from last week.

The Dow Jones edged slightly higher yesterday to 13,128 but pulled back to close at 13,073. Investors remain, to some degree, realistic about the prospects of more QE this week.

As well as the central bank decisions tomorrow, and on Thursday, there's the US non farm payrolls figure on Friday. Investors are awaiting extra clues as to the health of the US economy. A bad NFP number is likely to attract buyers back in as they'll feel it is yet another confirmation that action from the Fed is needed more urgently.

This morning, European indices like the DAX 30 are a little lower-to-flat on the open as the bulls just take stock of the recent gains.

Financial Spreads clients have been coming into sell around the 5700 level. This is not a surprise as we've seen the index fail at the resistance around 5700-15 on several occasions over the past few weeks. At the time of writing the FTSE stands at 5690.



Stock Markets: 30 July 2012

US markets held up well on Friday despite the US GDP data which showed a drop in growth to 1.5% and a slump in consumer confidence.

The Dow Jones climbed above 13,000 mark for the first time since early May. That increase has filtered through to the start of this week for European indices as they commence on the front foot with the FTSE up some 20 points at 5650. Today's economic data comes in the form of some European numbers on consumer and business confidence.



Stock Markets: 27 July 2012

So the big day is upon us and it's, as if by magic, Mario Draghi's comments yesterday came on the eve of the Olympic games and gave the markets a solid boost.

Many are hoping that these games will give a similar boost to the UK economy as Draghi's comments gave to equity markets yesterday. However, rather like the doubters who see the remarks about the euro as nothing more than hot air, we cannot expect a few weeks of sport to change the course of the UK's ailing economy.

A lot has been said and made about just how much the Olympics will contribute to the UK GDP. The long term effect though is rather more important and the last thing we will want to see is a similar ghost town that now exists in areas of Athens.

One would like to hope that with all the negative news out there, and following the dire GDP figures released this week, that things cannot get all that much worse.

Yesterday, markets across the continent rallied significantly after the ECB President announced that he will do whatever it takes to save the single currency.

Many of the European indices put on triple digit and large percentage gains as investors rushed to buy beaten up stocks as the prospects of more bond buying by the ECB attracted bulls in their droves.

The FTSE meanwhile was a little less sanguine as it only gained 1.4% compared to the DAX's 2.8% and the CAC's 4%. Perhaps UK investors are a little more sceptical of what Mr Draghi said. After all, it was nothing more than just words and no policy measures.

Of course policy measures cannot be expected to be announced at such a time. Therefore the market will want to hear more at the ECB's next meeting at the beginning of August, the same week that the Federal Reserve and the BoE also convene for their interest rate meetings.

But this brings us onto the wider argument about the ECB and its remit. In the past it has done its Security Markets Programme. The ECB claims the LTRO was done to assist it in its monetary policy. So perhaps there's little more it can do other than aggressively start buying Spanish and Italian bonds again in order to bring down the countries' borrowing costs.

If so, the already large ECB balance sheet is set to balloon. And no doubt the Germans are getting increasingly nervous about the possibility that they will eventually have to back the ECB at great cost to the taxpayer.

This does not however address the ECB's inability to undertake full blown bazooka type QE as the laws simply won't allow it.

For that, treaty changes will be required but the sort of changes needed will test the resolve of even the most pro-European German voter. Only time will tell what path the euro takes. Nevertheless, as mentioned, for the UK markets there seems to be a little more scepticism than most.

European indices are mixed this morning and the FTSE is adding a few points to yesterday's gains. At the time of writing the index is hovering around 5585.

US GDP data will be closely watched, it's due out at lunchtime today. After that, things are expected to wind down for 20.12 London time when the games begin.



Stock Markets: 26 July 2012

To QE or not to QE, that is was the question.

The one thing that is sure is that the Bank of England will be ramping up the printing presses once again. It won't be long before we see more asset purchases from our central bank.

However, the big question on everyone's lips is when the Federal Reserve will launch its version of QE3.

The word 'if' doesn't feature as expectations of another round of stimulus are almost fully priced into the markets. That is why (for now) the stock markets are managing to hold onto these levels.

The next two Fed meetings, at the end of this month and middle of September, will be critical for those bulls who are expecting action to be taken. If nothing materialises then there really will be serious disappointment.

Back to the UK and yesterday's GDP number made for dire reading. The Chancellor is getting it in the neck again. What is interesting is that, even though the headline GDP number reports negative growth the UK's borrowing costs remain at historically low levels indicating that the markets still have faith in the Coalition's deficit reduction plans.

A major drag on growth at the moment is construction and the outlook for the sector remains bleak so this is where the government can provide some sort of assistance.

The global picture isn't helping our exporters either but once the austerity measures have been implemented the country should, in theory, be in a stronger position to recover. Certainly the recent jobs data doesn't suggest that the GDP number should have been so bad.

The recent infrastructure plans announced such as more roads and rail are all very well but they take years to have an effect and a little more QE here and there is unlikely to help much either.

For the longer term prospects of the economy, things should be better once the government has trimmed the fat. Unfortunately the immediate impact is having a real drag on output, cuts to spending is a costly exercise. Nevertheless, it is a necessary evil as our public sector liabilities simply have to be more sustainable.

A surprise drop in 'US new home sales' had limited effect on the Dow Jones which managed to close 60 points higher and just above the 12,600 level.

Investors were instead attracted by rumours of QE3 and news from Boeing and Caterpillar who raised their earnings forecasts.

It might have been the case of bottom picking for some participants after three straight sessions of losses, and whilst the market did retreat from its highs later on, a gain is a gain.

However, this hasn't translated into much impetus for European markets this morning and the FTSE is currently standing at 5490, just a few points in the red.



Stock Markets: 25 July 2012

The markets continue to spiral downwards as the prospect of a full blown Spanish sovereign bailout relentlessly rattles investors.

The Eurozone is slowly getting itself into a more and more perilous state. This is largely because the markets do not see growth any time soon and the austerity measures being imposed are crippling and counterproductive.

The sorts of austerity being imposed by Greece and Spain are far beyond what even the IMF itself recommends as the sort of level that will at least give the respective economies a chance to grow.

In the case of the PIIGS their recessions are due to become even more entrenched.

Whilst their profligacy of the past needs to be amended surely it doesn't take much to see that the proposed measures are having the adverse effect.

As the economies continue to shrink, investors will be increasingly reluctant to lend. This is driving their bond yields higher and higher. The vicious circle of the Eurozone crisis continues.

Yesterday's troika visit to Greece hardly went swimmingly either. It seems that it was nothing more than an exercise that proved that Greece has little chance of ever meeting its deficit reduction targets.

Things have not been helped either by the ECB's recent move to no longer accept Greek bonds as collateral thus putting further pressure on the country's central bank.

The markets have been clear that there was an exceptionally slim chance of the targets set ever being met. As each day passes, the likelihood of an exit appears to increase. For those in the Grexit camp, it is only a matter of time.

All this is putting a dent in investor sentiment. And things haven't been helped either from the news across the pond that technology darling, Apple, have missed their earnings targets for the first time since 2003.

Apples results are on top of a string of disappointing results in the US which caused the Dow Jones to slip further into the red for the third straight session.

Speculation that the Federal Reserve might act to boost economic growth allowed a late comeback but not enough to erase the early damage. Overall, the Dow Jones declined 100 points to close at 12,617.

This of course has had a knock-on effect for European trade this morning with the FTSE 100 index commencing the session in the red, down some 10 points to 5490. Although that is much better than where we had been calling the index earlier.

A highlight for today will be the UK GDP figures this morning. They are expected show a decline of 0.2% confirming a triple digit recession.



Stock Markets: 24 July 2012

This morning we have seen Moody's put financial power house Germany on downgrade watch which has prevented the FTSE from adding to our earlier calls of a positive open.

In fact, the FTSE 100 index opened higher by some 20 points but has already reversed those gains and swiftly moved into the red.

With question marks over the prized AAA credit rating of Europe's largest economy the markets are likely to remain on the back foot. To add to Germany's issues this morning they have just seen worse-than-expected results in the latest manufacturing and services PMI surveys.

Growth in the Eurozone is very hard to come by nowadays and this is affecting Germany's activity as well as the UK's. Not surprisingly, tomorrow's UK GDP figures will be closely watched.

Also, see our report 'The Problem with a Ban on Short Selling'.



Stock Markets: 23 July 2012

Following a week that saw investors blinkered by the prospect of more stimulus from the Federal Reserve and solid gains for equities, another little dose of reality is hitting the markets this morning.

Headlines are dominated once again by problems in peripheral Europe as the vicious circle of handouts and bailouts continues.

National governments are being thrown money by Europe and the IMF. The governments then have to throw the funds at their autonomous regions and banks.

But it's the move by the IMF that's the significant one. Rumours are doing the rounds that they are going to cut off their aid to Greece.

The realisation that you are probably better off simply putting the money on a large bonfire, as opposed to giving it to the Greek government, is a signal that there is little faith in country being able to meet its debt target by 2020.

With the IMF saying 'enough is enough' the EU is going to have to fill the hole. And this is at a time when EU resources are already being stretched to the limit by Spain which recently requested €100 billion.

Needless to say the yields on Spain's ten year bonds spiked to a record high causing a sell off of all risk assets and, in particular, a pummelling for the single currency.

A major worry now of course is whether Italy will be next as Italian bond yields continue to slide down their slippery slope.

This is such an unknown as far as the amount of funds the country would need in respect of a bailout as its crippling debts and the size of its economy dwarf those of the periphery.

Italy is a G6 country with liabilities that stretch across the globe. There are so many parts of the financial system that it touches.

The thought of an Italian bailout is very scary indeed. A default and we're almost in apocalyptic territory.

Asian stocks have taken a bit of a hit overnight following the poor performance of US indices on Friday and the news-flow over the weekend.

This has filtered through to European trade this morning with the FTSE 100 commencing the week some 50 points lower and dipping below the 5600 level.

Only half a trading session ago, the index was testing the resistance levels around 5700 and looking like it was about to stage a late summer rally. Nevertheless the situation in Europe still dominates and this shows how positions can turn on a sixpence.

With politicians on holiday, and no up coming summits to speak of, it's little wonder that the consensus of a 'Grexit' either later this year or early next year is becoming more the norm.


By Simon Denham, 3 August 2012


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