April 14th 2011
If at the beginning of this year, we knew of the events that would headline the markets for the first quarter, we would may well have struggled to make money.
The unrest in Egypt & Libya; the fall of Portugal, the disaster in Japan, to name a few. But look at the equity markets, incredibly resilient to all this bad news.
The FTSE 100 for example started the year at 5950, and is now trading 100 points higher. Yes, during the Japanese disaster, it did plummet to 5500, but you had to be quick (and brave) to buy the collapsing prices, before they shot back up.
Similarly the Dow started the year at 11610 and is now trading 800 points higher. Are equities such a good bet, and what can possibly upset the party ?
There has been some encouraging news coming from the corporates, coupled with some healthier global economic growth numbers, but how long can this performance last, with soaring fuel prices, higher interest rates looming and the chance of a consumer led double dip recession. Not forgetting the effects of QE2 ending on June 30th. On that note, many traders believe that the end of QE2 will mark the end of the equity rally as investors have been riding the wave of stimulus coming from central banks. As I said many times before, I feel intervention often is just delaying the inevitable and QE2 may be no exception.
Many investors also feel that the US economy is self sustained following the better than expected employment figures that came out week before last, forgetting that there has been huge stimulus to help these numbers along. Investor complacency springs to mind; a trait which is not so common amongst the more professional traders. However central bank stimulus is not the only factor driving US share prices higher; weak dollar and therefore strong exports, plus low interest rates have improved profit margins dramatically for US companies.
Prospreads has seen many of its professional Bond speculators playing from the short side, anticipating that inflation and precipitating higher interest rates; admittedly they have been shorting government bonds for a few months, and having seen the market against them, but are now back on side and in the money, with, for example, June Gilt futures trading down from 119.00 to 116.00 in just 3 weeks.
Commodity prices remain high with Oil threatening new highs. As always many of the pro traders trade with the trend, so have been well positioned with longs over recent months capitalising on climbing prices.
So trading patterns amongst professionals still suggest that lack of central government liquidity with de-stabilise financial markets, particularly equity markets; however they may continue to ride the up wave in the short term, reacting quick to any reversal.
A final thought… is QE3 (4&5) on the cards ? Unlikely.. unless of course oil trades above $150, sending the global economy spiralling south again…