Gold !

It takes a huge amount of bravery to step forward and say that the gold price has reached its top; even though the price is five times higher than where Mr Gordon Brown decided to liquidate the country’s gold reserves! There have been signs that its relentless climb of the last four years is faltering but is it just taking a rest before continuing as the investment of choice in such uncertain global economic times? Silver has stolen the spotlight in the last couple of weeks with a dramatic increase in trading margins catalysing a cataclysmic liquidating exercise, precipitating in a 30 percent drop in its price since the beginning of this month! That would normally suggest a sector downgrade driving the other precious metals lower, but for those who fail to find a safe haven investment in uncertain times, then maybe Silver positions will be rolled into gold. I have seen plenty of trading days recently where Silver has been sliding with gold rallying, so there may well be some truth in that theory. From a technical perspective it is probably a while away before the chartists report a reversal on the gold rush and the professional traders generally can’t help but stay long.

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Dollar Strength.. reversal or dead cat bounce ?

The US dollar may have had some rest bite recently from its prolonged slide against some of the other currencies in the majors league, but there is still doubt as to whether the recent bounce in its value is one of the ‘dead cat’ variety…
The EUR/USD currency pair has pretty much straight lined from 1.18 to 1.49 in the last 12 months and similarly from 1.42 to 1.67 for the GBP/USD pair. A logical reason for this would be that problems in US are worse than those in Europe and mending the US problems is even more difficult than fixing the Eurozone issues. We have seen the likes of Greece, Ireland and Portugal receiving bail out packages from the other Eurozone counties and the IMF, but who is there to help the US, if they get in trouble… ?
Ok, that does not bear thinking about but if the forever optimistic US consumer is struggling to support its beleaguered domestic economy, then maybe a double dip US led global recession is on its way.
This of course does not mean things can’t get worse in Europe though..far from it, with default on bail out debt a genuine possibility. But until that happens, the US dollar may see further weakness; not forgetting that the green buck still sits towards the middle of the historic 3 year range at 1.40 against the Euro (range, 1.20-1.60) and lower end of the range at 1.62 against Sterling(range, 1.40-2.10).
The flip side being the US will be gaining some benefit from its weak currency by spurring on demand for its exports…
Prospreads professional trading clients, although short term traders, have been generally playing from the short side, when speculating on the US dollar and signs are that is not about to change yet….

Foresight not always a good thing..

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…

A distinct pattern emerging amongst the Pros..

A distinct pattern amongst professional traders has emerged; long the UK equity markets, long commodities and short bonds. However, to sustain this particular play, traders need to sustain short term volatility and immediate down-side equity pressures following weak GDP numbers, and take a long term investment horizon.

It is easy to get wrapped up in the doom and gloom headlines which have become almost a permanent fixture on front pages of many newspapers. However, looking at long term value levels is a feature of the “pro trader” and, despite the risk of a double-dip, the resilient equity markets seem to be outperforming expectations of many analysts; the Eurozone crisis has done little to dent the joy of relatively impressive corporate growth and earnings. The FTSE 100 index, for example, is some 1000 points of its high of 10 years ago and, whilst I appreciate we can’t trade on such long time spans, it is hard to make a case that – on a technical level – the large cap stocks on the UK index are overvalued. Indeed, many of the blue chip stocks in Europe are still delivering healthy dividends. With interest rates staying low, there are few alternatives for decent yields (assuming you don’t want to be involved in the sovereign debt market). In short, the view of our professional trader client base is that whilst the momentum is on the upside, it’s often best to go with it.

Shorting government bonds have been a favourite play for many of the longer term pros over the last few months, but as with any long term play, deep pockets are sometimes required. Gilts for example have traded from over 124 down to 118 in just a couple of months. Expectations of higher inflation and interest rates were the reason for shorts and it seems inevitable, with all the quantitative easing that has been going on, that inflation will continue to increase. However, as has been widely remarked upon by commentators, raising interest rates may not be the solution due to the concomitant risk of a debt ridden “consumer lead double dip recession”; CLDDR, pronounced ‘colder’, may be the next acronym to dominate the financial pages later in 2011 following PIIGS, CoCos, CIVETS etc) Obviously here I am talking specifically about the UK consumer and I think that the tone for this year will be selective investment as clearly some economic divergence is inevitable, not just in Europe but globally. So, our long term bond speculators remain short, determined to sit on their positions resisting temptation to take profits too early.

Outside of the core equity/bond plays, precious metals are still a favourite amongst the professional market participants. Gold, although well off the highs at 1350, seems to have seen renewed buying activity over the last couple of weeks amongst our client base, with many expecting to see new highs again in this first quarter of 2011.

Currencies are emerging as the asset class of choice for professional traders. Not surprising given that it trades 24 hours a day, with extremely tight spreads and high leverage. The EUR/USD is still the main pair with professionals looking for 1-2 cent moves, which can sometimes materialise with a trading day. As trading opportunities are abundant in the short term, there are few long term directional traders but the fundamental consensus is that the Euro may see investment from the Far East as concerns that the Chinese economic bubble may be close to bursting.

ProSpreads clients, comprising only professional traders, seem to have been getting the majority of their calls right over the last 6 months with short bond positions, long equity and long commodity positions; there is no clear indication that they are about to change their views.

Rallying Euro..what’s the fuel ?

Today’s rally in the Euro is on the back of slightly more favourable conditions emanating from Portugal, in that they may not need financial support from the rest of Europe…for the moment.
It is likely the professional speculators have been running short positions in the EUR/USD contract and may have needed to cover their positions as the price has recovered, providing extra stimulus to the upside. Technically the EUR/USD price has reached a resistance level on the charts at 1.3450, so the price may take a breather here. Long term the professional traders are likely to continue to look for further weakness; with 1.22 a target if Portugal and more importantly Spain seek help.
The fact that countries outside Europe are looking to support the weaker Eurozone countries is definitely a factor to consider. Although external support could be considered a positive, it does not give off the right signals that the Eurozone cannot ultimately support itself. In the short term, as long as Portugal refrains from seeking help, the EUR/USD price may retest the key resistance level at 1.3450; a break above which may catapult the price short term towards 1.3650.

Precious Metals may be the best alternative

Renewed uncertainty likely to refuel demand for Precious Metals.
After a relatively quiet first week of 2011, there are rumbling undertones of uncertainty emerging.
Eurozone sovereign-debt concerns and a slower than expected recovery in the US economy are the core reasons why investors may flood back into Gold.
Gold has rallied for 10 consecutive years and there appears to be no reason why 2011 should be any different. With little obvious choice of where to invest, Gold may come up high on the lists for Alternative Investments.
The spot price price of Gold reached an all time high of over $1,430 an ounce last month and then took a breather as end of year profit takers pushed the price back down to its current level of $1,380 an ounce.
If signs of recovery do falter, then Gold and Silver may well be the first choice for investors – all eyes on economic releases over the coming weeks…

Happy New Year !

Global equity markets start the year with a bumper rally. Kick started by a 100 point rally on Wall Street yesterday, the Far East equity exchanges also saw gains with the Hang Seng gaining almost 150 points (0.59 %) and the Nikkei 225 170 points (1.65%); Historically, traders believe that any rally at the start of the year should set the tone for the rest of the year. That is likely to hold true, but maybe only for the first quarter as austerity measures are likely to bite in a few months time in certain Western countries.

Divergence between some global economies is likely to be the headline theme for most of the year. The problem is, which economies are going to prosper and which will suffer ?

It is fair to say that the German economy is likely to continue to diverge from (outperform) other European economies, particularly the Mediterranean ones (excluding France). Also Far Eastern economies are likely to outperform Western economies for most of the year.

With many commodities finishing the year on their highs, continuing gains are likely for the first few months of 2011, partly spurred by the threat of inflation. Government bonds should also continue their downward spiral as higher interest rates loom.

So the trends seen in Q4 2010 should continue throughout Q1 2011; however the moment Western interest rates increase, pressure will exert itself on the debt ridden consumer which may well dampen the corporate led recovery we have seen in the last few months.