Financials / Simon Denham / 07 October 2008 / Leave a comment

Daily View - 7th October 2008

With any luck we will have a bit of a relief rally this morning after the US managed to recover from the extreme lows during yesterday's session. The Dow hit a base of 9518 in the evening session and this morning is being called back over 10000 at something like 10065. I say 'something like' because by the time I commit this copy the price will probably be another 100 or 200 points difference!

In spite of my repeated advice to clients to sit on their hands a steady stream of buyers was seen throughout yesterday's sessions as punters tried to 'bottom pick'. The steady destruction through the day and early evening left most longs hanging on the ropes. Only those with deep pockets were able to withstand the drama and this morning everything seems just a little bit rosier.

Rumour trickled around dealing rooms about the viability of a range of major banks with, in the UK, the focus settling on RBS/Nat West. The stock closed down over 20pc dropping 44p to 145p a new low for the year/decade. The bank was the obvious target after the huge disaster of the ABN purchase had done for its co-bidder Fortis in Belgium. Lest people forget RBS paid for ABN, in the main, with borrowed money.

Whilst the focus has been on the exchanges the real drama was unfolding in the currency markets. At one point yesterday the Euro had fallen by over 10 Yen from the close on Friday making a low print at 135.03. This represented a one day fall of 7pc of one major currency versus another and added to the 25 yen fall already seen since July. Aside from the UK's ejection from the ERM back in the nineties I cannot remember such a violent dislocation. The entire Euro plan is being called into question as the absence of any central lender of last resort is causing individual nation states to "make it up as they go along". This is creating something of a problem for holders of the Euro itself. If nations start to pull out of the Euro project (and I do not actually believe things are even remotely this bad yet) it will make valuation of assets in the currency almost impossible. Better to dump them for the time being and put your cash into Yen, Dollars and even (cough, cough) Pounds.

The fact that two of the weakest nations have 'guaranteed' deposits should not distract depositors from what is perceived as safe and what is actually safe. If the 'ess' 'aitch' 'one' 'tee' really hits the fan then I am afraid that neither the Greeks nor the Irish could possibly afford the cost. The guarantee would be worthless.

This morning sees the FTSE called some 80 points higher at 4665 still very weak but nowhere near the lows being quoted at 19.30 last night when we hit 4435. The danger is now that we all get caught in a 'dead cat bounce' (again) of which we have had two huge ones in the last few weeks (Paulson Plan/short selling ban and the Aftermath of the House of Representatives voting down of the plan).

I would also like to point out that, contrary to popular opinion, short selling bans seem to have had exactly the reverse impact to that expected. With no ability to balance books market makers are now forced into position neutralisation all the time and the effect has been to magnify stock price moves. Since the ban Barclay's stock has 'averaged' a 13.5pc trading range every day. The equivalent of 650 points each and every day in the FTSE 100. And this is one of the more stable bank stocks!

Gold got its flight to quality move yesterday on the violent stock and currency moves but not as big a shift as in previous falls. We are well below the highs of a few days ago and in fact although we rallied over 30 bucks yesterday we are still below last Wednesday's close. There is solid resistance between $865 and $870 which will keep longs on their toes and we are opening this morning at around $865 just beneath this cap. A break through might indicate a move back up to 882 and with the 900 level obviously glittering above. On the down side dealers will be watching for signs of robustness from the equity markets which might indicate the end of the current bear phase.

Oil is rallying this morning having fallen sharply over the last few sessions. The low yesterday in Brent November at 83.40 took us back to the turn of the year and with the US falling to 1991 consumption levels you can see why. If Developed World usage continues to weaken the argument for strong oil starts to look very weak but with winter coming up the recent failing demand is likely to reverse in the short term.

The Tradefair Spread Betting Team