Traders wondering where next?

Daily Financial Analysis / Simon Denham / 18 February 2009 / Leave a comment

Daily Comment Wednesday 18th February

Markets looked over the abyss yesterday but have pulled back just marginally to leave traders wondering where next.

In a meeting last night with an analyst I was feeling reasonably confident that the recent falls were containable and merely a reaction to fears over the stimulus package might (if no follow through was seen) indicate that support built over the last four or five months was unlikely to give way. Unfortunately his apocalyptic scenario left me rather breathless. The Dow is apparently only just above the 100 year (i.e. its entire existence) support level and if we close below 7500, or thereabouts, then the financial stability of the West might be imperilled. Blood on the streets and all that! While I might be willing to accept that the level might be important trying to equate the financial well being of the United States to a simple line on a graph is less easy. Let alone the fate of the global economy being fought out on a boring Tuesday in February.

Anyway the Dax, S&P and Dow are all now below serious chart levels and it seems that only the FTSE, even though falling 100 points in the session, still had enough in it to remain above the critical 3985 support. The early call this morning is for a small bounce across the Major indices with the FTSE indicated at 4065 (up 30) the Dax at 4245 and the Dow at around 7600.

Traders continued to buy into weakness yesterday which was, therefore, made the session not one of our clients' finest hours although they did very nicely, once again, in Gold and in GBP/USD where the 1.4150 level mentioned in yesterdays column held good for a bounce.

The news that GM and Chrysler are putting their hands out for another $29bln of aid while at the same time laying off another 50K employees (if you say it all quickly it does not sound so bad) had its expected effect with after hours trading confirming the Lows for GM down at $2.15, a new closing nadir for the stock. In reality it is difficult to see how the shares are even worth this much as a company that is actually operating, day to day, at a loss with a falling market share in a contracting economy effectively translates into a doomed project. The Banks, for all of the Bad Debt, are actually operating (in the main) profitably which makes them a different argument (aside from the absolute need for financial stability) for state assistance. Nationalising a bank is a tough decision but one that can be made, nationalising GM, Ford or Chrysler is not.

Many of the US banks also hit new lows as selling anything remotely associated with the new funding package became more endemic. It is difficult to see how any of the companies now accepting any funds for survival can fail to end up as either state owned or bankrupt given that it must be accepted that if they are in trouble now what on earth will be their situation in six to nine months time.

Sterling recovered somewhat against the Euro as traders seem to be falling out of love with the prospects for the European project. The news that the Germans may come in to bolster the debt requirements of some of the weaker members merely highlighted the dangers involved. Over the last 18 months the perils of throwing good money after bad have been underlined again and again and it will be a brave Chancellor who would propose undermining the German's hard fought and hard earned financial stability to save what is (after all) a political ideal.

Selling pressure on the pound is still there but does not seem (at least to me) to be a powerful as in the recent past. New lows are not being even remotely challenged in each attempt to hammer the Pound down and it might (but only might mind you) be pertinent to point out that there is a great deal more room for manoeuvre on the upside than on the down.

Brent broke through the support at 4300 mentioned yesterday and my comment that a print of 4275 should worry the buyers was bourne out with a vengeance as the market went from $43.00 to 42.25 in just a few minutes before continuing lower throughout the session. Brent April is now at new lows for the contract and with Nymex trading at 38.14 this morning there might be fear of a spread contraction between the contracts (historically Nymex usually trades slightly higher than Brent). If Nymex does mange to narrow the spread this may be an indication that, finally, the heavy oversupply of crude stored in the Gulf of Mexico may be in the process of being wound down. If this happens then Crude might recover some of its lost ground. A lot of Ifs in that comment but the Brent/Nymex spread does bear some watching.