The spectre of full nationalisation looms large over the likes of RBS and Lloyds, and the prospect of this is weighing heavily on the beleaguered pound. Sterling is being shunned as traders speculate on the scale of the governments eventual liability with regard to the banks.

The finger of blame for the current collapse in banking shares is pointing at the short sellers once again. John McFall, Chairman of the Treasury Committee, wrote to the head of the FSA asking them to investigate anecdotal evidence that some hedge funds have been shorting stocks.

It is almost inevitable that the short sellers get the blame; they are after all a convenient target. However, it should be recognised that conventional investors selling their holdings in droves can have a greater effect on a share price. After nationalisation of Railtrack and Northern Rock, investors could be forgiven for taking their cash and running at the faintest whiff of nationalisation for Barclays, RBS or Lloyds. While the short sellers may be playing a part, it is record losses, ongoing rumours and unquantifiable risks that rattle share prices the most.

Barry Ritholtz of www.ritholtz.com put it rather bluntly ” wipe out shareholders, bond holders, and all the bad debt and the junk paper these firms hold, zero it out,  and spin out the assets with clean balance sheets.” The Treasury has effectively admitted that it has no idea how much this will all cost UK tax payers eventually. This coupled with a rumoured downgrade to the sovereign credit rating of the UK government has pushed sterling down to below 1.3700 against the dollar level. The final nail in the coffin for Sterling came when the UK GDP figures came in well below estimates at -1.5% for the last quarter.

The coming weeks big ticket item is the next FOMC interest rate decision. With rates currently at 0.25%, there is little room for manoeuvre. Speculators will be following the announcement closely to see if the Federal Reserve will follow Japans lead from the 1980s, and cut rates to zero. Almost as important as the rate decision, will be any accompanying announcements on other measures the central bank is taking to get credit markets functioning again.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

According to Bespoke Investments, the S&P 500 suffered its worst 9 day start to the year ever. The omens aren’t great with the rest of the year returning -0.74% when the market gets off to such a stuttering start.

US (un)employment and banking problems once again dominated the headlines. Citi group announced it will split in two after announcing an $8.29 billion loss. At the same time, Bank of America posted its first loss in 17 years while receiving a $138 billion bailout.

Economists talk about the prospects of a V, U or L shaped recovery for the worlds various economies, reflecting the expected speed of any return to growth. The prospect of the US or UK following a Japanese style “lost” decade or L shaped recovery would have been laughed at just a couple of years ago, but the world is a very different place today. Economists have made various predictions that the recovery will begin in the fourth quarter of 2009, or first quarter of 2010, but perhaps what is scaring people the most is the growing realisation that nobody knows what is going to happen. Arguably, the banks still haven’t confessed all their subprime sins and until they do, rumours will continue to spread concerning capital requirements. As they are at the epicentre of the crisis, this uncertainty could continue to shake markets for a good part of 2009. The global recovery may turn out to be worse than most people expect, it may turn out to be better, but nothing makes an investor reach for the sell button more than the unknown.

It was never going to be a good week for the FTSE when its two main sectors; finance and energy led the selling. Global banking giant HSBC hit the headlines after a Morgan Stanley note warned that it might have to raise $30 bn and cut its dividend in half. Deutsche Bank added to the misery by announcing a $6.33 bn loss in the last quarter. They were forced to deny rumours that this was down to a rogue trader. Considering the size of the loss, one has to wonder whether it is worse that such a loss was generated through authorised channels.

The biggest market mover at the start of the week was Bernanke’s speech, in which he outlined the need for further capital injections and guarantees for banks. Considering this came in the same week as BoA’s bailout, one can only assume that he was right on the money. The notion of UK banks requiring further capital injections was highlighted recently by The Bank of England deputy governor Charlie Bean. Most UK financials have now reversed all of last week’s gains, as traders speculate that this capital injection is moving closer to reality, along with the creation of a so called bad bank’ that would soak up toxic assets. Many analysts are now in agreement that something needs to be done, and although the treasury continues to deny such an act is on the cards, it may be a question of when, not if.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

Adding to the gloom, major US blue chip companies, Intel and Time Warner both posted earnings that fell below analysts’ estimates. Wal-Mart also surprised by lowering its fourth quarter outlook. Analysts are concerned that if the world’s largest retailer had its figures set too high, then there is the real risk that earnings estimates are still too high across the board, going into earnings season. In short, the fear is that the bad news hasn’t yet been priced in, a scenario which is hardly going to be a positive catalyst for the next few months.

On the currency markets, it was a rare strong week for the pound. Sterling raced further away from parity against the Euro, and is pushing towards the $1.5000 level against the US dollar. Traders repositioned themselves after the bank of England cut by ‘just’ 50 base points, while at the same time speculation grew that the ECB will have to ease their relatively tight monetary policy soon. Traders now doubt that the Euro zone will be as strong as many thought this year. The British and American economies are still on the sick list, but now it is becoming apparent that struggling European nations such as Italy, Spain, Ireland and Greece could force the ECB to cut rates. The coming week is relatively quiet, starting off with Bernanke speaking on Tuesday. US retail sales come on Wednesday, with PPI and unemployment claims to follow on Thursday.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

Stocks started 2009 on the right foot, with a broad based rally that took the Dow Jones within above the psychologically important 9000 level. The Dow hasn’t managed to successfully hold this level since the first few days of November. Commodities looked to be willing to make good some of the losses generated throughout 2008, with oil continuing to move above the $40 a barrel level.

The coming week is dominated by the UK interest rate decision, which comes on the back of Halifax’s announcement that house prices dropped 16.2% last year. This was the worst annual fall on record, bringing prices back to 2004 levels. The Bank of England also warned that the impact of the credit crunch was likely to intensify in the next few months. The MPC is expected to cut yet again to 1.5%, bringing UK rates closer to near zero US levels, and widening the gap between Sterling and the Euro. Friday also brings the all important US Non Farm Payroll figures which are expected to show another drop in the region of 500,000 jobs.

Jason Goepfert of the SentimenTrader.com, points out that the latest AAII (American Association of Individual Investors) Sentiment Survey puts US investors as having the lowest allocation of stocks in their portfolios since 1991. The level of cash hoarding has reached record levels. According to Goepfert, the only two times when cash allocations and stock allocations reached similar levels (around 40%) was 1991 and 2002. Both occasions were good contrarian indicators.

While it is unlikely to be a smooth ride, there are indications that markets are moving past the bad news to what lies beyond. A Bull trade predicting that the Dow Jones (Wall Street) will be above 9500 in 2 months time could return 103% over the next 60 days.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

US pending home sales fell less than expected, and this provided good cheer to markets as it may indicate that the US housing decline is slowing. With so many mortgage backed securities still out there, a steadying of the US housing market could help alleviate some of the pressure on global financial institutions. The UK economy is still showing few signs of improvement though with October production figures falling more aggressively than expected. There was increasing chatter about a ‘Treasuries’ bubble last week. The yield
and 5 and 10 year notes plumbed to new depths, as traders continued their flight to quality. The yield on 3 month US Treasuries turned negative, meaning that investors were literally willing to pay to put their money somewhere that is perceived to be safe. Another unusual act to add to the ever growing pile of ‘once in a generation’ events, were reports that the Federal reserve is considering selling bonds under its own name.

The Pound held its ground against the Dollar, but was well and truly smashed by the Euro, which today set yet another record high against Sterling. The Euro even kissed the underside of its synthetic high of 0.9000 based on the old Deutsche Mark from 1996. Friday’s, news of HBOS’s dreadful £8bn write-down hit the general banking sector hard. Many economists predict that the UK economy won’t recovery until the back of 2009 at least, which means that lending conditions could get even worse for the UK banks.Until recently, the ‘independence’ premium hadn’t worked its way through in the banking sector. However, there are signs today that independence from the UK Treasury could start to become a significant advantage. On Friday, Lloyds, HBOS and RBS closed down 18%, 23% and 15% respectively. The remaining two major UK banks not to seek government assistance; Barclays and HSBC finished down just 8% and 2% respectively.

The banks have an almost impossible task of providing shareholder (and taxpayer) value, whist at the same time being seen to re-start lending to home owners and small businesses. Northern Rock shows precisely why these two competing aims are difficult to align. Northern Rock’s management team has been hell bent on repaying the government’s loan as quickly as possible, and it is making good progress in this regard. The problem is that to do this, it has reversed its lending policy, and is now lending out less than is being paid in. This is good news for taxpayers, but bad news for consumers.The economic landscape will be dominated by the US interest rate statement due on Tuesday. Analysts are expecting a fresh round of cuts from the Fed. Fed fund futures are currently implying a 60% probability of cut down to 0.25%, with a 30% probability of a cut down to 0.5%. On the same theme, UK rates are expected to push lower soon, and Wednesday’s MPC meeting minutes will help traders determinate the size of the likely cut. In my own view this is likely to be a further 1% as unemployment is forecast to approach 2m and then movce to 3m by the end of next year.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

Last week’s announcement that the US was officially in recession was a bit of a non event. A recession has been in train for both the UK and US economies for some time, but optimism or fear over its severity has been waxing and waning over recent weeks, as world governments released various stimulus packages. Last week was certainly not for the optimists, with investors flying to the safety of US Treasuries, pushing the benchmark yield down to record lows. Friday’s Non Farm Payroll numbers confirmed what many Americans are already experiencing – the number of people in private employment is falling. Like readily available credit, jobs are being squeezed on both sides of the Atlantic.

The latest UK purchasing managers’ survey showed that UK manufacturing fell at a record pace in November. The falls mirror similar record declines in US manufacturing which also contracted the most since 1992. The outlook for the UK in particular looks grim, with mortgage lending falling to near record lows. The poor manufacturing data and dramatic interest cuts sent the pound sharply lower against most major currencies. Last week, the pound hit 0.87250 ( euros to pounds ) against the Euro, its lowest level since the introduction of the European single currency – not great news for travelers but good for those of you holding euro assets.

Demand for US Treasuries shows no signs of stopping. In addition, sovereign credit default swaps have gone through the roof, reflecting both the cost of the planned stimulus packages and the growing severity of the global recession. At the start of the year, Credit default spreads for the UK were just 8.9. Last week they moved higher than 125, meaning it would cost $125 to insure a $10,000 sovereign investment. Germany currently has the lowest CDS levels, while Argentina has rocketed to over 4,000. Russia is also elevated with CDS levels approaching 800. With its extreme moves, the bond market is telling one story, while the stock market recovery on Friday told another slightly less apocalyptic tale.

Resource and energy stocks were under pressure as crude prices continue to slide. Oil prices made a century of sorts last week, at below $47, oil prices have now fallen over $100 from their peak in July. The decline is all the more remarkable when you consider the fact that oil started the year under $100. Crude eventually closed the week at just above $40, though oil majors such as BP, Shell and Exxon Mobil managed to hold up relatively well. The divergence between oil prices and oil majors may possibly be a function of oil producers being able to extract good margins, as the price at the pumps hasn’t fallen to the same by the same severity as the price of crude.

This week’s stand out economic announcements include UK PPI on Monday, and manufacturing production on Tuesday. US pending home sales are released on Tuesday afternoon with trade balance and unemployment claims out on Thursday. With Christmas around the corner, US retail sales will be followed closely on Friday, as will the University of Michigan consumer sentiment numbers.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

Despite the recent sell off in crude oil prices, energy companies still maintain a heavy weighting in most stock indices. Last weeks crude rally certainly helped rather than hindered the performance of equities last week. Light crude found support at $50 and rallied to close the week at $54.43. It is hoped that the announced Chinese interest rate cut will restart the Chinese economy, which was the biggest driver of the oil boom in recent years.

As always, the first week of the month is a busy one on the economic data front. The coming week kicks off with US and UK manufacturing figures, followed by Fed chairman Ben Bernanke speaking in the evening. Thursday sees the MPC release the official bank rate. Last month they shocked everyone by slashing rates down to 3%, and there is likely to be further cuts this week. Analysts are currently predicting a cut of between 50 and 100 base points down to 2.5 or 2%. The ECB is also expected to cut rates by at least 50 base points, down to 2.75%. Friday brings the all important US Non Farm Payroll figures. Analysts are expecting a drop, but downward revisions to previous announcements could also be an important factor.

Last weeks rally is all the more impressive because it came in the face of yet more dire economic data. This in itself is an encouraging sign, as markets could have easily taken last weeks US durable goods figures and PMI numbers as a cue to sell off significantly. With US markets closed for Thanksgiving, and many traders enjoying an extended holiday, European equities enjoyed some relatively quiet sessions. In fact, on some days last week the FTSE 100 traded within its tightest range since the end of September. Credit markets are continuing to unfreeze, and the VIX Volatility index closed below its 50 period moving average for the first time since the start of September. Implied volatility levels remain high, but at least there are signs of calm creeping into equity markets.

The recent tragic events in India failed to have too much of an impact of equities, with most European stocks moving little in either direction as the crisis broke. It is worth noting the muted reaction in gold prices at this time. Gold is traditionally seen as a safe haven in troubled times, yet despite the traumatic events in India, gold barely moved at all over the period of the crisis. With the implied risk of world governments defaulting on their bonds increasing, one would also have expected gold prices to increase, as investors seek out safe havens for their assets. There are many factors affecting the price of gold, not least the strength of the dollar, but perhaps last weeks lack of reaction is another indicator that volatility is set to decrease further as we approach the last month of a tumultuous year. Just last week, 2008 was set to be the worst year on record for many markets. Although this year will undoubtedly go down in the history books no matter what happens from here, there is a chance that it wont end as it began.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

Support:    $10.062 (40 day moving average)   Resistance: $10.797 (high of 6th November)

Support:    $10.020 (yesterdays low)     Resistance: $10.680 (high of 24th November)

Support:    $9.708 (14 day moving average)  Resistance: $10.530 (yesterday’s high)

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

Support: $802.00 (yesterdays low) Resistance: $848.50 (high of 16th October)

Support: $800.00 (psychological level) Resistance: $844.15 (high of 28th August)

Support: $780.87 (40 day moving average) Resistance: $832.35 (yesterday’s high)

©2010 Market Analysis. All Rights Reserved By Anna Coulling.

The cost of insuring against investment grade companies defaulting shot up to its highest level since the crisis began. Worse still, Warren Buffet’s Berkshire Hathaway fund has seen the cost of its credit default swaps shoot to 5 times the level they traded at in June. At current levels, the CDS prices are implying that Berkshire is more likely to go bust than Morgan Stanley. When the Dow was trading around 13,000, Buffet used derivates to effectively bet that the market would be higher than this level in 15 to 20 years time. While there is still considerable time for this bet to work out, Buffet has already marked down a $6.7 billion loss on that trade. When investment ‘Gods’ such as Buffet look ready to fall, it is hardly surprising that investors are running to safe havens.

Just two months ago, the US Federal Reserve was still concerned about the “upside risks to inflation”. With last week’s 1 % decline in US consumer prices and rapid declines in UK inflation figures, we’ve gone from fears over inflation and stagflation, all the way to deflation in the space of 90 days. As a sign of the times, oil prices hit a new milestone last week. Just four months after making record highs of $147 a barrel, oil touched a low of $48.25 on Friday, a remarkable drop of 67%. The rapid demise in crude prices is having a direct impact on the Russian economy and stock market. Since May the Russian stock market has been leading other so called BRIC nations lower, with a drop of around 70% since the May highs.

Financial shares led the selling. HSBC received a broker down grade on fears of the state of its tier 1 equity ratio. HSBC was formerly at arm’s length to the rest of the banking sector with its relatively low exposure to US subprime loans. However, the ‘world’s local bank’ is now feeling the pressure due to its exposure to emerging economies, especially the troubled BRIC economies. In the US Citigroup was hit hard, losing half its value in just three days. Once the biggest US bank by market value, there is speculation that bad loans and writedowns may add up to losses totalling $20 billion for the troubled Citigroup. Some commentators point to Treasury secretary Paulson’s change of tack with regard to long directly buying toxic assets under the TARP program for sparking much of last week’s sell off.

This week starts with the German Ifo business climate report which will analysed closely after recent announcements that many parts of the Eurozone are already in recession. US existing home sales are released at 13.00 on Monday and analysts are expecting further declines to 5.02 million from 5.18 million. Tuesday morning brings a raft of UK economic announcements with the MPC treasury committee hearing top of the list. Preliminary US GDP is announced around midday, with the revised UK figures out the next day. Thursday is an extremely busy day with a large number of US announcements. Core durable goods, unemployment claims and new home sales are the notable highlights. The rest of the trading week could be relatively quiet with many traders using Thursday Thanksgiving holiday to make a long weekend.

There is simply no telling what the market or economy might be like as we start 2009. A selloff of this speed hasn’t been seen since the 1930s, and although comparisons have often been made of late, it is worth noting that at the low points of this period, rallies, when they came were surprisingly aggressive. Barry Rithholtz last week noted that the AAII individual investor’s stock allocation was 15% below its 21 year historical average. Although not marking the exact bottom, readings of this nature were not a million miles from the lows of 1987, 1990 and 2002. With a hoard of cash waiting in the wings, there is always the possibility of this reading again marketing the bottom. However, this market has left many seasoned professionals scratching their heads as the selloff has been unlike anything seen for generations. In recent months, these markets have reached extremes of sentiment that in the past have market key turning points. The trouble is that of late, markets have continued to make new extremes way beyond previous inflection points.

©2010 Market Analysis. All Rights Reserved By Anna Coulling.