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What's Next..North or South!
On a day when you hear about the worlds largest bank CITI Group losing $5
Billion and cutting 4,000 jobs world wide, you might expect markets to be
down severely. You might also have expected the FTSE to stumble on the news
that RBS is preparing a rights issue to shore up its balance sheet. However,
apart from some early nervousness on Friday, the UKs benchmark index managed
to close the week up 3.2%. The CAC & DAX both managed 4.3%.
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The worse is behind us argument continued to gather pace as evidenced by RBS
share price actually rising on the day of the rights issue announcement.
Investors had been speculating for months that RBS would be taking this step
and in some ways the eventual announcement relieved some of the pressure on
the UK banking sector. More than anything markets hate indecision and traders
seem buoyed by the hope of an eventual end point to the liquidity crisis.
A significant catalyst last week was some positive earnings announcements from
some heavy hitting US companies; Intel, Coca Cola, Honeywell, Caterpillar,
Google and IBM all surprised to the upside. According to Bloomberg, profits
have slumped 26% on average from the companies releasing results so far with
the financial sector being the worst hit. However, this was largely expected
to be the case, and share prices have adjusted to price in consensus
estimates. One important question is whether US companies have truly under
promised and over delivered, or if investors are just fearful of missing out
on a rally.
On the currency markets, the Pound and Dollar made up lost ground lost after
figures showed Eurozone inflation hitting a 16-year high. Chinese CPI was
also red hot with staples such as soyabeans and rice continuing to rise. The
price of rice has doubled since August 2007 while sugar and wheat have
retreated from recent highs. The king of commodities, oil, continues to make
record highs and until this market significantly retreats, inflation
projections will remain high. This will put further pressure on central banks
such as The Bank Of England, which has to balance fighting inflation with
easing the liquidity crisis in the credit markets.
Inter bank lending rates have remained stubbornly high since the summer, with
the actual cost of lending being a quarter point higher than the official
LIBOR rate. The fact that The Bank Of Englands recent loan action was over
subscribed by three times the amount tells its own story. With little
movement on LIBOR or mortgage fees so far, the next move could put further
pressure on the Bank of England to cut rates.
Traders at BetOnMarkets forsees that while the worst may or may not be behind
us, what is probable is that it won't be plain sailing from here in either
direction. There may still be some pull backs along the way even if March
turns out to be the low point of this credit crunch for the FTSE. A one touch
with the trigger set to 5900 could return 50% over the next 17 days.
For more information contact:
Mike Wright
Betonmarkets
editor@my.regentmarkets.com
http://www.betonmarkets.com
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