It was a case of two steps forward and two steps back last week for world equity markets. Global equities were served a reminder of just how difficult bear markets can be. Traders are quick to grab whatever short term profits they have made, making it difficult for rallies to build momentum. Equities shot out of the starting gate in the early part of the week, largely due to a relief rally in the banking sector. The clear catalyst was the announcement from Barclays that it won’t be going to the market or government for more cash. This, more than anything strengthened investor’s confidence in Barclays and across the sector as a whole. However, as impressive as today’s performance is, the rally needs to be put in context. Shares in Barclay’s are still around 50% lower than they were just two months ago.
It wasn’t plain sailing though, with severe selling towards the end of the week. This time, the worry wasn’t specifically related to complex financial deficits. Fears were more in relation to general analysis that banks are not the place to be in during a recession. With house prices continuing to plunge on both sides of the Atlantic, rising unemployment and an increased risk of default on loans, the recession itself is enough to put pressure on banks. This is before you take into account their dire capital adequacy positions. US house prices are continuing to plumb new depths. The 10 and 20 city indices are down over 25% from their peak and over 18% on last year. House prices are now back to 2004 levels with further to go if the current trend line is anything to go by. Near record US jobless claims and record lows in levels of housing starts go hand in hand as job security fears cause home owners to make do with what they have and stay put. The inability to get mortgage on reasonable terms is of course a significant factor.
Adding to the considerable volatility was the number of US companies announcing earnings that fell below analysts’ expectations. ‘Make do and mend’ is a view that many shunned during the boom years, but slowly but surely, western consumers are coming round to the idea of keeping their affairs on a tight budget. Microsoft’s business model largely depends on individuals and businesses buying new computers with upgraded versions of their software installed. With the economic slump starting to bite, consumers are making do with their existing machines or sourcing machines from the very bottom of the range. Last week, Microsoft’s share price skirted with the November lows, which in turn is the lowest point since 2000. On the other hand, buoyant sales numbers from Apple indicate that like holidays, the iphone & ipod are luxuries that shoppers aren’t prepared to let go of just yet.
The coming week is full of top tier economic announcements with Friday’s Non Farm Payroll numbers top of the pile. Wednesday’s ADP employment change will provide a good steer for Friday’s numbers. Aside from this we have the rate statement from the MPC on Thursday, with analysts expecting a cut down to 1%. Speculation is also rife that the ECB will follow suit with a cut just 45 minutes later. The Euro was down hard against the pound last on speculation that the European Central Bank now has now choice but to follow other the US and UK and cut towards 1%.
The Euro/ US dollar exchange rate has been relatively range bound over the last three months after a sharp fall starting in August. With the Eurozone potentially having further to go in terms of cutting rates, we could see the euro fall further against the dollar. No world economy is in particularly brilliant shape at the moment, but arguably, the Eurozone may come under further pressure over the next year as its member stats contract at wildly different rates of acceleration. Credit Default Swaps are used as a measure of a particular country’s risk of defaulting on its loans. The score is the cost of insuring $10,000 worth of debt over 5 years. Last week the US was at 75, while France and Germany were at 68 and 59. This might theoretically imply that the Eurozone was in better shape. Unfortunately the risk of other Eurozone nations defaulting is much higher. Ireland’s risk level was 285, Greece 283, Italy 184 and Portugal 145.
A one touch trade predicting that the Euro/US dollar exchange rate will hit 1.100 in the next 6 months could return 245% at BetOnMarkets.
