I have now just about recovered from my visit yesterday to Lords. Good company, good cricket and copious amounts of champagne can be a scary combination but I just about managed to scrape through and I even got off at the right station on the way back to Hindsight Castle. With Test Match Special in the background let’s see if we can make any sense of these markets and see where we can make some money.
The recent turmoil in the Middle East, or should I say the latest episode, has sent oil and Gold higher and equities lower. Though most people seem to be focusing on events in the Lebanon I am personally more concerned about the potential for troubles to escalate in India and Pakistan following the bombings in Mumbai. It seems an open secret that Bin Laden is in Pakistan and that Musharraf has not been as tough on the Islamic militants and their training camps as he promised to be. With Pakistan trying to suggest that the bombings could be related to the failure to resolve the problems in Kashmir there is a good chance of a further deterioration of relations between these two nuclear nations, one of whom is being relied on, along with China, keeping the world economy afloat.
Added to these global macro problems we have rising interest rates across the world on top of massive global consumer, corporate and government debt. The Bank of England have warned that a sudden jump in interest rates caused by rising oil prices could cause a 2% fall in economic output and wipe-out banks profits. Considering the weighting that banks enjoy in the FTSE and the S&P500 the potential for a large equity slump exists. If this happened there would obviously be an impact on the housing market as suddenly many people would realise that’s it’s not them but rather the banks that owned their property.
So how do we make money?
Sell shares and wear diamonds seems a pretty good call to me. The semi-conductors are down over 25% from their highs of the year whilst the S&P is less than 10% lower. A close below 1235 on the week opens up 1160, a break of which would see 1060 come into play. The SOXX looks like it will close the week below $425 trend line support, which opens up further falls.
In the FX markets participants continue to get whipped around in fairly range bound markets. It is worth noting that during the summer holiday period we often see counter trend rallies so I would be wary of playing the dollar on the short side, preferring to wait till September before looking for a continuation of the dollar fall; if that is indeed your way. I will look to play some cross trades and am looking for opportunities to sell sterling against the crosses, possibly against the euro, the Swedish Krona and also the yen but in these tricky markets the timing is more important than ever. The FX markets are particularly tricky due to the amount of speculative money trying to chase the market, many of which use similar entry criteria. Accordingly we keep seeing false breaks as market makers manipulate stop loss orders and we have to change to allow for this.
For example we have some good support in Eur/Stg between 0.6860 and 70 and though I am going to buy some euros at current levels I will not do my full amount, using any sharp stop loss related fall through 0.6850 as an opportunity to buy some more, rather than having my stop loss there.
Anyway I am going to watch some cricket and contemplate the irony of the Natwest three sitting in a high security prison whilst the government squirms over the investigation of cash for peerages.
Have a nice weekend all
Harry
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