Stock Market Update 23 December 2011

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Stock Markets: 22 December 2011

Yesterday saw a continuation of the volatility that has very much been the theme of the second half of this year.

After the bumper round of loans provided by the ECB markets pushed higher in a flurry of buying as investors foresaw a thawing of the credit markets with fresh liquidity flooding in.

It sounds like easy money for the banks, lent at only 1% over three years, however it all depends on how they use it.

If you can get a loan at 1% and then but Spanish or Italian debt at 5-7% then it's a no brainer, but would you want to risk exposing yourself to countries that are heading towards recession, if not already in it?

The idea is to repair Europe's banks that are clearly desperate for cash in order to prop up their balance sheets. Therefore they have much more breathing space to absorb the losses on the 50% haircuts and be able to recapitalise in an orderly fashion.

The problem is that that's precisely all this new money is likely to do, rather than trickling down to cash hungry businesses and help boost the wider European economy.

Just as soon as the markets rallied on the news that the amount of loans provided smashed expectations indices reversed their gains and we ended up with a poor session.

This morning however markets are a little perkier following a flat-to-positive session for US markets.

Buyers seem to be relieved that the sell off in Europe did not follow through to US trading and if it wasn't for the Dow and S&P we would probably be much lower.

US investors seem to be gearing up for Christmas and the year-end much more so than their European counterparts. In reality the US economy is growing well and some of the recent economic data has been surprisingly positive. It's as if they are largely ignoring the problems going on in Europe, despite the threat of what it could cause them due to their banking sector's exposure to Europe's banks.

For now the UK 100 is heading higher and so maybe, just maybe, we might see that gain for the month of December. Having said that, in spread trading, at 5450 the index is currently down 1% so far this month. The Dow is just in positive territory.

Lots of data out today with the final release of UK GDP which is expected to remain at 0.5% for Q3. However that's probably about as good as it gets going forward. Expectations are for the UK economy to really struggle in 2012.

Next quarter is expected to show a rise of about 0.3% and then a possible contraction in the second quarter ahead of the Olympics when things are expected to pick up again, so for now an official double dip in the UK is not expected.

We also get the 3rd release of US GDP for Q3 due in at 2.0%. At the same time initial jobless claims and then end the day with University of Michigan confidence.



Stock Markets: 21 December 2011

Maybe Father Christmas is going to deliver for equity investors after all following a strong rally in US markets yesterday on the back of not very much at all.

This is why the markets are so difficult to predict at the moment; when things on a macro level look really dire few would expect investors to jump into stocks and expose themselves to risk.

Despite all that's going on in the overall economy, and the prospect of a recession in Europe next year, this doesn't necessarily mean that you should sell the stock market right now.

Indices are forward looking barometers and they look beyond any potential recession in Europe or the UK next year. In fact, even if it comes later than expected it is unlikely to be an especially deep one, unless of course we see a worst case scenario of a complete European break up.

There are other worst case scenarios of course, including the possibility of a recession across the pond in the World's biggest economy.

However, there you can expect the Federal Reserve to do everything in its power to avoid such a scenario because their greatest fear remains deflation. With inflation expected to drop off a cliff next year, the deflation threat suddenly becomes a reality again just as it did in 2008/09.

The final worst case scenario is China and its booming economy. If there was to be a dramatic slowdown in growth there then the knock on effect for global growth will be significant and cause many others to head towards a recession.

Despite the bullish tone to early trade this morning we have seen that the UK is not such a safe haven after all following a warning from Moody's that our treasured triple A rating is under threat.

A few times in this comment we have mentioned that the UK is not immune to such scrutiny and this shot across the bows may not be a friendly one.

A downgrade to our credit rating is something that the Coalition has been fighting so hard to avoid, but the reality is that we are borrowing more now than had been expected and growth is simply flat lining.

It comes as little surprise that the Gfk consumer confidence data that came out in the UK earlier this morning did not paint a very pretty picture.

The calls this morning for the FTSE are seeing indices in Europe, such as the CAC and DAX, adding to the gains they made yesterday and the move higher saw a break out to the upside of the downward channel.

At the time of writing the FTSE is another 40 points to the good at 5460 having been called even higher just before the open.

Bulls will be focusing on the near term resistance levels seen at 5500, 5550 and then 5600. To the downside support is seen at 5360 and 5320.



Stock Markets: 20 December 2011

The stock markets can't get the momentum they need to get this year's Christmas rally underway.

The markets remain depressed by the prospect of a difficult year ahead with banks needing to further deleverage and build greater capital reserves at a time when liquidity will be vital to keeping our economies going.

The Eurozone debt crisis isn't getting any better either so the outlook is bleak to say the least.

Banks are being hit from all angles as the Basel III safety buffers are due to come in place from 2013 and the Vickers report is set to be implemented to ring fence retail and "casino" banks. Increasingly it seems that the investment banker is being confined to the history books.

George's olive branch to the likes of HSBC and Standard Chartered yesterday may go some way to persuading them to stay in the UK, however full implementation is not due until 2019. As a result, there's no question that the rules will change again before then and probably be watered down.

They will have to also comply with any changes in Europe as one rule for UK banks won't necessarily work when there are different rules for other banks.

The sad reality that the UK taxpayer is going to have to come to is that our "investment" in RBS is unlikely to see any sort of return.

As we saw with Northern Rock recently, the taxpayer made a loss, but less of a loss than had the sale gone ahead at any time in the future. Value was slowly being depleted bit by bit until eventually there may not have been a buyer at all.

With RBS it's a similar story. For as long as the government holds its massive stake in the bank it will continue to have its wings clipped and returns will be much smaller than in the boom years.

We may be holding onto our stake for many years to come as with many investments that go wrong, a short term one can suddenly turn into a very long term one.

The FTSE's in the red at the time of writing having opened in negative territory and stayed there at around 5330.



Stock Markets: 19 December 2011

A significant and major geopolitical event is causing a degree of uncertainty amongst spreads markets this morning as Asian markets have sold off following the death of the North Korean leader Kim Jong-il.

The last thing markets want is uncertainty and this is exactly what will bring as questions are raised about who will take over and just how the regime will be led under a new leader.

For a country that has been so closed to the outside world for so long, some will see this as an opportunity for a new beginning. However, even if a new regime does become more open, it will still take many more years before the country becomes anything like its southern neighbours.

The event is a major one from a geopolitical point of view and goes to show that markets can be affected too, but the real focus remains on Europe and its debt problems.

Fitch is the ratings agency that has the daggers out for France this morning and a threat of a downgrade to them is spreading negative sentiment amongst investors.

On top of this the new ECB President has hardly given warm words of comfort over the weekend as he warned of a break-up. Bit by bit as the problems continue to rumble on, more and more of the rhetoric includes talk of a possible break-up.

The FTSE 100 is down some 30 points at the time of writing in the mid 5300 area having been called to open even lower. For now we're suffering less of a loss than our European counterparts where the DAX and CAC are seeing slightly bigger losses.

Our account holders have been buying into this recent weakness in the FTSE, believing that there still can be the usual Christmas rally, but the downward channel that is forming doesn't look very promising for the bulls. The upper part of this channel is around 5425/50 so we'd have to see a break above here before we can be certain that Father Christmas is coming.

These few days in the run up to the festive period are historically the more bullish of the month as a whole and so any contrarian investors may well be thinking it's time to buy ahead of the year end. Any such move, whether it is higher or lower, will most likely be on the back of low volumes.



Stock Markets: 16 December 2011

Downgrades here and downgrades there with S&P and Fitch chopping the ratings of various banks not just in Spain and Europe, including the UK, but in the US too.

The moves caused a conundrum amongst contracts for difference account holders who had welcomed yet another well subscribed Spanish bond auction and positive economic data. This indicated glimmers of hope for both the Eurozone and the US, where initial jobless claims fell to their lowest level since May 2008.

This jobs data from the US is very encouraging for their unemployment and overall economy which has just been through the biggest Thanksgiving and Christmas sales ever and seen its rate of unemployment decline just this month.

It's little wonder that Bernanke didn't mention anything about any further stimulus or extension of keeping the Fed Funds rate at low levels beyond the middle of 2013 when their economy seems to be turning a corner.

Not much can be said for our side of the Atlantic, however yesterday did see some encouraging signs from the services and manufacturing core of Europe. PMI data took a little jump higher, although much of it still in contraction territory.

Investors continue to battle against the back drop of this European debt storm and indecision continues to remain rife.

When you get assets like the US dollar spiking you have to start to worry. The normally perceived safe haven of gold has seen a mass exodus and volatility remains high.

Maybe this is a sign that the fear has gone too far but few seem willing to take the risk of jumping into the equity market. This is of particular concern as we are supposed to be in the most bullish month of the year.

The FTSE is just about grinding out a gain this morning, holding onto the 5400 level. A downward channel has formed in the past couple of weeks, the upper trend line of which comes in around 5450 and the lower below 5300.

With such little economic data out today and next week being effectively the last one of the year, with Christmas in the way after that, many people are probably tempted to net off their books and call it a year.

Volumes are likely to be low from here on in, but this is where markets can sometimes be pushed to the upside. With triple witching today anything can happen.



Stock Markets: 15 December 2011

Yesterday's sell off indicated that investors are getting more and more nervous about the state of affairs in the Eurozone.

The fact that the index spread trading markets haven't sold off further, and that they are bouncing in early trade so far this morning, comes as something of a surprise.

Despite all of the efforts being made by European leaders, a possible break up of the Eurozone is becoming more and more likely.

Signs that people are preparing for such a break up are already being seen as money presses for individual currencies such as the Drachma and even Deutsche Mark are ready to go at a moment's notice.

In addition, the world's biggest inter-dealer broker has been testing its execution systems for currency deals in the event of anyone exiting the Eurozone.

As a result the euro has taking a pounding, most literally too as sterling looks increasingly like more of a safe haven than many other currencies.

GBP/EUR has been heading back towards €1.2000, but just this morning is running out of steam and the interest on UK gilts continues to head lower as investors buy up UK government bonds as a safety precaution.

This once again indicates the faith the bonds market has in the coalition's deficit reduction plans, even if they are going slightly off target due to the lack of growth.

Even though the European debt crisis has dominated financial markets throughout 2011, and seems to have been all this column has been writing about, there seems to be little prospect of that changing into the New Year.

As mentioned the FTSE 100 is in bounce mode this morning and, as we are now in the middle of December, this tends to be the time that the bullishness in the run up to Christmas really gets going. However, for the index to get back into positive territory for the month it has to climb another 90 points from its current price of 5415.



Stock Markets: 14 December 2011

The FTSE is holding up pretty well considering that earlier we were calling the index to open flat to lower and the US session didn't exactly get the bulls rolling back into the markets.

A credit crunch across Europe is underway which can explain why the euro took such a bashing yesterday. However, despite this crunch, the equity markets seem to be largely ignoring the similar situation that we faced just over four years ago.

Just as back in the middle of 2007 when the last credit crunch lead to the then banking crisis, this time there's a real threat that this one could fan the flames of the sovereign debt crisis.

As banks deposit overnight money with central banks as opposed to other banking institutions the lack of liquidity means that less cash is available to drip feed through to the wider economy.

This causes the vicious circle to continue going round as the lack of funding to businesses and individuals knocks growth on the head. This in turn puts further stress on countries' budgets which are already feeling the squeeze from austerity.

The one major thing that Europe really lacks at the moment is confidence and that confidence doesn't exist because there is no clear growth strategy.

It's all about austerity and imposing fiscal discipline, which is required to a certain degree, but without any real growth plans the problems will only get worse.

A little bright spark from yesterday was the decline in inflation from its peak, which will be received as welcome news for shoppers around the UK, particularly at this time of year.

This is the second month in a row that inflation has declined and as we enter the New Year, when this January's VAT hike will come out of the numbers, the headline rate should continue to drop.

It would really be nice to see petrol stations take a leaf out of the supermarket's books and pass on lower oil prices to motorists as it still costs a fortune to fill up the tank. Despite the fact that the commodities markets have eased somewhat in the latter part of this year, prices at the pump have remained high.

The December rally is proving hard to come by this year, with the FTSE below where it commenced the month.

At the time of writing those Christmas bulls are trying their best to push us higher with the FTSE market trading at 5465, but we're still some 0.7% lower so far.

Even though the rallies seem short lived at the moment there is still that feeling that a Christmas rally is possible. The closer we get to the festive holidays, the closer we are to the more bullish part of the month from a historical point of view.

Economic data today comes in the form of UK unemployment figures which are set to make for gloomy reading. The jump to 8.3% last month was worse than expected and today the markets are expecting to see this push higher to 8.4%.



Stock Markets: 13 December 2011

Stock markets are pausing for breath after yesterday's big sell off that could be enough to mean that this December might be one of those rare ones where Father Christmas doesn't give investors what they're after.

As we approach the end of 2011, it will be a year that many will want to forget. It's been a terrible year for stocks, the European debt crisis has deepened and, with global growth slowing, the outlook for 2012 isn't all that much better.

Fund managers have had it tough this year as the pressure on them continues to mount with investors becoming more and more demanding for capital appreciation during these times of record low interest rates and high inflation.

The ability to stock pick is becoming increasingly difficult. Many investors have thought they're onto a bargain only to see their holding down 5% the next day because of a wider sell off in the market due to the ongoing risk aversion caused by the Eurozone crisis.

Yet another summit passes and investors have been left scratching their heads as to whether anything is going to be any better in six months time.

With all the big credit ratings agencies circling above the Eurozone, as well as ten year bond yields spiking, it remains difficult to get excited about equities and, as we've seen in the past, rallies tend to be short lived.

The FTSE is just in the black at the time of writing at 5440 after US markets bounced off their lows towards the end of trading last night.

Support areas are near by seen at 5410/5395 and then 5350 with a bit of a downward trend line forming in the short term putting resistance around 5500 and then 5555 and 5605 to the upside.

Our contracts for difference account holders have been tentatively buying into the recent weakness, hoping that the support will hold out and, despite yesterday's sell off, the Christmas rally could still materialise.



Stock Markets: 12 December 2011

David Cameron made a big call last Friday to veto the new EU treaty, which was much to the dismay of the Lib Dems.

They had even considered quitting the coalition until they saw two major public opinion polls, from The Times and Daily Mail, which sided with the Tories' decision on the veto.

Lib Dem Clegg, believes that Britain will become isolated and the move won't actually do anything for The City or jobs up and down the country. Only time will tell whether Cameron has made the right choice and if it pays off.

Whilst the UK attempts to sort out their problems, the world is still waiting to see what will become of the Eurozone's problems.

IMF Chief Economist Blanchard agreed there had been some progress, but we haven't actually reached a full solution, and every time we get a statement out of Europe we see volatility in the contracts for difference markets.

The summit last week attempted to agree on boosting the Eurozone's loans to €200bn, which would accelerate the European Stability Mechanism in order to increase its lending capacity.

After last week's volatile intraday market swings, we have seen the FTSE 100 start the week on a downer, floating around the 5500 mark.

We could see further volatility as we have the release of some data this week, in the form of UK RPI and CPI inflation data.

We are currently seeing a bit of a bearish stance on the FTSE with 5555 as a key resistance level, and so we could expect some short term consolidation.


By Simon Denham, 23 December 2011


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