Market Comment 7th May 2010

Simon Denham - 7 May 2010

So the FTSE markets opened 160 lower and immediately added 100 points to rally to just 60 off in the first quarter of an hour.

The air of nervousness is palpable in all the markets after the chaos of yesterday evening when some programme trading in the US caused mayhem. The Nasdaq (on which many of the trades took place) has announced that any trades which were greater than 60pc ! off on an individual stock have been reversed but that all other trades stand. As an example of what happened Accenture fell from $41.00 to a traded low of 10 cents (!) a mind bogglingly stupid occurrence and one that can only happen when computers are allowed too much control.

Naturally rumours swirled through markets that something had happened to cause the sell off (a major European Bank failure was the favourite for a while) but ultimately the solution appears to be the unpalatable fact that the falling markets triggered a whole swathe of Black Box systems to start selling stock ‘at market’. There were not enough buyers around to sop up the surge in offers and the systems just continued to try to hit a bid (any bid). Whoever was running these programmes will be sitting on possibly Billions of dollars of losses as the market recovered just as quickly.

Just before Christmas last year I was asked my prediction for the FTSE’s level at the end of 2010. I gave the answer “5250” for the sole reason that it was trading at that level at the time of the question and I could not really see any reason for either a rally or a fall. A week ago with the FTSE pressuring 5800 I was resigned to being seriously wrong on my rather ‘tongue in cheek’ prediction but suddenly we are back under the number at 5210 and I am looking quite guru like!

At least the election is now over so we can get back to some sort of normality. Labour cannot form a government with just the Lib Dems and will need other parties to agree to a coalition. This rather damages the power of the Libs as they will probably now have to deal with the Tories if they want to get into power sharing and will be unable to trade one party off against the other. The harsh decisions that will have to be made over the next few years will have a huge number of dissenters in all the parties and I do not fancy the job of chief whip for the next parliament. A coalition of Tory/Lib Dems/ Ulster Unionists is probably the most stable pairing as it will not rely on all the Lib Dem members voting the way of its leadership.

We are in very dangerous waters in the markets in general with extreme volatility suddenly breaking out (May is always a bloody awful month). The FTSE does have major support at 4970/5000 although it did trade as low as 4830 or so last night but this can be discounted as a break as it relied on the mess in the US. While the sell of the last few days has been precipitous it is difficult to really get a handle on the real underlying causes. Corporate results have been much better than expected and, while the sovereign debt issue has been headlining, other issues should not impact the equity markets to quite the extent that has been the case. The reactions over the last few days merely emphasise the fact that not everyone was really convinced by the last 13 months of near one dimensional direction.

It is time for tin hats, deep pot holes and even deeper pockets as clients attempt to hold positions against the vagaries of the markets. Sitting on your hands in this type of activity is definitely the best policy.

On the currency markets there is a different worry. The Euro has now almost reached the longer term target for the Bears of around 1.2350/1.2450 (mentioned …..ooohhh ….way back last week when we were up at 1.3250) and the cross actually got as low as 1.2520 last night. It is difficult to get our heads around it but.. the Euro is still overvalued on a purchasing power parity view point although it is now marginal. Movements like this generally go too far so there is still a good possibility of even more pain for Euro longs.

The only winner in all the chaos was Gold as investors desperately searched for any port in a storm. The yellow metal reached as high as 1210 but this might now prove difficult to match as saner markets come back into focus. Dealers will be concerned that the rally was not more powerful as other asset classes went into meltdown and so longs may well start to take profits.

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