It was a dire for stock markets, with all major world indices trading well in the red. Thursday saw the bulk of the selling as US markets moved quickly to pre-empt Friday’s poor Non Farm payroll figures. There was also the technical problem of the bulls being unable to push the market higher despite lower oil prices.
Initially with commodities getting bludgeoned, global stock markets took the opportunity to rally at the start of the week. Across the commodity sector, the notable weakness was in the energy sector with oil and natural gas prices leading fallers. It is not just Energy prices that were down, other commodities such as gold, copper, wheat, soya beans, and rice all fell through previous technical support levels. Recently equities had been on a promising run, but it was false hope. When markets were going up, the bad news didn’t seem to matter, but when they failed at key levels as the S&P 500 did at 1300 last week, traders took another look.
Financial stocks were in focus again last week after the former darling of the credit crunch, Goldman Sachs, had its third quarter and 2008 earnings estimates cut by Credit Suisse. The firm pointed to weaker trading volumes and severely reduced investment banking activity. Also hitting financials was the news that commercial banks are hitting the MPC’s primary credit discount window at much higher rates than expected. In fact, when you look at a chart of the current levels of commercial lending at this ‘emergency’ window, usage levels remain very high indeed. Current usage is way above any level in the last five years and well above levels from last year. To make matters worse the ECB tightened it’s lending criteria, meaning that banks depending on the ECB window to survive will find it even hard to keep going.
Perhaps it was coincidence, but a research piece from SocGen title an “Economy and equity market meltdown imminent†certainly caught the zeitgeist last week. The piece warned “Typically we have now reached the point in the cycle where companies reach the end of the road on earnings manipulation, and have to admit to their shareholders how bad things really are, sending reported profits diving.†The piece implied that analysts currently see no prospect of a non-financial profits slow down because companies have not yet owned up to the real mess they are in. It continued .“We are at a very similar point to the end of 2000, just before corporate capitulation sent reported profits and the economy diving and the equity market collapsed.â€
As the fears over Hurricane Gustav died down at the start of last week, it was UK PLC that appeared to be facing ‘the mother of all storms’. Last week the Pound fell to record levels against the Euro, and to its lowest levels against the Dollar since April 2006. Traders rapidly priced in Alistair Darling’s bleak comments and the 70% drop in mortgage approvals, which is hardly a catalyst for a buoyant housing market.
There was no good news from the two central banking announcements on Thursday last week, but then none was expected. Both the MPC and ECB have their hands tied by roaring inflation and slowing economies, the worst of both worlds. Trichet did provide an unwelcome surprise though by indicating that the Eurozone economy is weaker than it was previously thought. Adding to the dramatic fall last week was the resurgent Dollar, which has been displaying an inverse relationship with oil. The Greenback is also now trading at levels not seen against the Euro since late 2007. Some analysts believe that the Dollar has bottomed out due to the ongoing slump in the US trade deficit, rather than relative growth disappointments outside the US. SocGen state that this could see the Dollar continue to rally even as US growth data disappoints.
BetOnMarkets traders foresees that next week will be impacted by the three day OPEC meeting which may dictate the future direction of oil prices. Monday top tier announcement is the UK PPI data in the morning with similar inflationary data on Tuesday with UK Manufacturing production. In the afternoon we get an update of the ongoing US housing saga with month on month pending home sales. On Wednesday, Trichet’s speech gets top billing as does the MPC treasury committee hearing on Thursday. Friday sees a raft of US data with retail sales, PPI and University of Michigan Consumer sentiment data. A one touch trade predicting that the USD/ EUR exchange rate will hit 1.40 in at any time during the next 90 days could return 21%.
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