A little hope for the festive season after a turbulent storm

A little hope for the festive season after a turbulent storm

By: Mike Wright

Tricky would be a choice world to describe global equity throughout the second half of this year. Stock markets and economies appear to be balancing on a knife edge with the chances of a global recession as high as 50/50 according to some analysts.

The credit crisis, interest rates, inflation, government debt and consumer spending are all interconnected and will form the focus for 2008. Last week, global stock markets closed a jittery week strongly with sentiment swinging around the news flow of these five factors. On Thursday, the Nasdaq 100 closed up over 2% on better than expected consumer spending numbers and earnings reports from Research In Motion (Blackberry) and Oracle Corp.

The FTSE was one of the strongest markets last week on news that the last interest rate cut was voted for unanimously. This may increase the chances of a series of further rate cuts, with the next cut expected to come as soon as January 10th.The MPC said that a "substantial loosening of policy"might be needed to head off the risks to economic growth from the credit squeeze.

Sterling plummeted to its lowest levels for three months against the dollar and to near its all time low against the Euro. UK shoppers hopping over to New York for Christmas shopping will have had much less of a bargain than hoped as the USD/ GBP exchange rate dropped below $2 to the pound on Thursday.

A dramatic surge in Government Borrowing also affected sentiment as data from the Office of National Statistics showed that the UK's current account deficit had doubled in the third quarter to £20bn. This is now the biggest deficit in cash terms, at 5.7% of GDP and is now bigger than the US deficit comparatively.

However a rate cut in January isn't a done deal with inflation fears persisting. A 'no change' verdict is most likely at the next meeting, according to many senior economists and interest rate futures. Libor (London Inter Bank Lending Rate) fell last week on the back of the global central bank 'rescue' plan. It is hoped that the easing of this rate means that credit markets will begin to flow again in the New Year without the need for another rate cut.

There is much talk of the Santa Clause rally coming into effect between the close on Christmas Eve and New Years Eve. Since 1940 the S&P 500 has been up during this period 76% of the time with an average gain of 0.8%. The effect has diminished in recent years according to Bespoke Investments with the S&P 500 actually posting a decline on average during the festive period since the start of the current bull market in 2003.

According to the Stock Trader's Almanac when the rally doesn't appear, it can be bad news for the stock market. "If Santa Clause should fail to call; bears may come to Broad Wall" as they put it. This was certainly on the mark back in 2000.

Next week there is a reduced Christmas trading calendar. Most notable are US core durable goods orders & consumer confidence on Thursday. On Friday, house price sentiment will again dominate with the UK's Nationwide house price data and US new home sales released at the end of the week.

Thursday and Friday's strength was impressive, but it could be argued that the rally from Tuesday was too far too fast. We are entering a seasonably positive period, but the speed of Friday's rally may have exhausted the bulls' enthusiasm earlier than expected.

Therefore a no touch higher may be the better option for the Christmas week and beyond. This allows for some minor further upside while providing exposure to churning market over the next month. A 'No Touch'higher on the S&P 500 with the trigger set to 1590 over 35 days returns a yield of 10%. This level is 14 points higher than the all time high posted in October.

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Contact Details:

Name: Mike Wright Tel: 448003762737 Email: editor@my.regentmarkets.com Url: Betonmarkets.com & Betonmarkets.co.uk

Address: Regent Markets (IOM) Limited 3rd Floor, 1-5 Church Street Douglas, Isle of Man IM1 2AG

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