Wall street Rally...Credit Crisis Over?

Wall street Rally...Credit Crisis Over?

By: Mike Wright

Last week the ECB (European central bank) and MPC (UK central bank) opted to take a ‘wait and see’ approach with interest rates. Both announced that they would be leaving interest rates on hold, preferring to see how their respective economies hold up after the summer turmoil. Many economists are expecting both to move to a loosening bias in the future, with the UK predicted to cut rates before the end of the year.

Early last week US markets powered higher on the release of economic data that increased the likelihood of a further 25BP cut in interest rates. The Dow Jones smashed through its previous record high of 14,000, while the broader S&P500 followed suit on Friday. Leading the charge has been the high tech Nasdaq 100 with companies such as Google, Apple and RIM (Blackberry) powering to record levels. Many questioned Google’s IPO price of $100 per share, but with a share price approaching $600, Google continues to grow at an astonishing pace.

Next week starts with some heavy announcements for the UK, with PPI and industrial production figures having a potential impact on any interest rate decisions. FOMC meeting minutes are usually scrutinised word by word by Fed watchers, and Tuesday’s release of this information will be no different. Every line will be examined and opaque sentences will be interpreted, all in the hope of garnering clues as to the likelihood of a further rate cut. Wall Street is baying for another cut, and any hints either way could see the market move significantly. Friday sees the release of vital retail spending and consumer sentiment data in the US, both of which will reveal how much the recent credit turmoil has affected the wider economy. Some economists have put the chances of a recession in the US as high as 50%, but this view was questioned with stronger than expected payroll numbers last Friday.

Elsewhere on the currency markets the Euro has come off its highs against the Dollar and Sterling, but remains well above pre summer/ pre spike levels. Part of the reason for this strength has been the drop in interest rates in the US in comparison to the tightening bias of the EBC. Both the EBC and MPC may follow their American cousins in cutting rates, but if they do, it is perhaps likely that there could be a time lag between a potential MPC cut and a potential EBC cut.

On this basis the Euro could remain strong against the sterling until 2008. In addition December could bring a shock to the UK government finances. A recent report revealed that by December the Government may have to include its PFI liabilities on its balance sheet. If this were indeed to occur it could put further pressure on Sterling as government debt increases. With this in mind, a no touch trade could be a suitable option on the EURO/ GBP exchange rate. A no touch with a trigger at 0.6700 over 90 days returns 12%. This allows time for any potential PFI difficulties to come into play.

Personal commentary From Matt Shaw

The Dow continues to play tag with the 14000 level. I do however think, that anything beyond 14200 on the Dow will not be seen for several weeks now, possibly months.

For the S&P, if we break below the 1445 level over the next 2-3 sessions, then the sell-off could commence. I estimate that we will begin the breakdown (if it hasn't already started), by way of a gradual process after next Tuesday/Wednesday - 9th/10th Oct'

There is a lot of cash out there right now, ready to be put to work. Before now, it has been split evenly between Stock Funds and Credit Funds. With the Credit Crunch saga coming to fruition (funny choice of phrase) of late, this has led to many people cashing in their investments from Credit funds, Bond funds and Fixed Income, then put them to work into equities.

Equities seemed like some sort of safe haven and losses are seemingly more controlled. Combine these factors with low interest rates, and the backdrop of inflation, and it seems equities were an ‘easy buy’, hence no big sell-off toward the end of Sept.

I now feel that we are set to Range trade over the coming weeks and I say this with a mild hint of hesitation - we may then sell-off from (more than mildly) end middle/end of Oct. With the FTSE - Resistance 6610 with support at 6325. This week could be the start of a strong decline, or new highs, by way of a further 1-2% rise!

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