This and fresh write down announcements from large financial firms, all but eradicated the gains from the spectacular rally on Wednesday.
The big question many analysts were asking was is the worst really over? The problem is that many firms dont actually know themselves how much their sub prime holdings have dropped in value. As one commentator put it, forthcoming write downs may turn out to be smaller, but there will still be a long parade of them. This Trojan house as one cartoon recently put it, may still have further damage to cause.
Notable last week was the decision by a US judge, not to grant Deutsche Bank legal ownership of a group of houses in which the mortgages had defaulted. Despite owning the buildings on the face of it, due to the complex way in which the mortgage debt had been parcelled up and re-sold, the judge ruled that Deutsche Bank was unable to prove that it still owned the houses. As these houses, and houses like them have been used for collateral for various exotic investment vehicles, it is no wonder that the financial sector is still plagued with uncertainty.
In the UK Barclays Bank announced multi billion pound write downs last week. Shares initially rose on the relief that the amount wasnt as bad as initially feared, but they later fell, as relief turned to fears of slower growth for
the stock.
UK Sales data showed slowing demand, and the ECB revised down 2008 GDP growth projections from 2.3 to 2.1%. The MPC chose their inflation report to warn about the risk to UK shares, and the prospect of a jittery economy next year. This and reports that interest rate cuts may be forthcoming in early 2008, sent the pound down sharply against the Dollar and Euro. However, possible lower mortgage repayments could soften the blow of 0% house price growth next year, as predicted by Nationwide.
On the technical side there may be some positives. The AAII (Association of American Individual Investors) Sentiment Survey reached an extremely pessimistic reading last week, and according to www.sentimentrader.com the markets are positive 90% of the time in the intermediate term, after this reading. The 10-day moving average of the upside volume of stocks on the S&P 500 reached 39.5%, which tends to be near the end of short term declines, according to Bespoke Investments. In addition, Mark Hulbert who tracks the best newsletter tipsters, reported that the best newsletters were still bullish on the markets.
The Bank of Japan reported that it is difficult to decide when to raise rates again. This could mean that the next tightening phase is some way off. This would be good news for the carry trade with the Yen remaining cheap. Some analysts have pointed to there being a 90% correlation between the Euro/Yen exchange rate, and the performance of the US stock market.
Next week is less data heavy than last, with the main announcements coming from the UK. Wednesdays MPC meeting minutes will show how close the Bank of England was to cutting rates at the last meeting, and more importantly how soon theyll start to cut rates. Fridays GDP figures will provide further clues as to the strength of the wider economy.
Right now the picture is as murky as it has been over last few months, with the financial sector remaining a big unknown. However with a relatively light economic load next week, and some seasonal and technical positives, the next couple of weeks may keep the tides at bay. Thursday is Thanksgivings Day in the US and as usual the stock market is closed and Friday is a half-day. Its hardly ideal trading conditions, but the days either side of Thanksgiving tend to be seasonably positive, so a no touch lower trade may prove the better option this week.
BetOnMarkets.com traders predicts that a no touch trade 90 points below the current spot price of the S&P500 yields 10% over 14 days.
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The Trojan House
