Until last week, there have been two stories running in parallel. The first
story is of rampant inflation fueled by the price of oil making record new
highs every week. The subtext to this story is the dawn of a difficult
decade. The second story is of a stock market that believed inflation would
be contained and that the worst of the credit crunch is behind us. Last week
these two stories collided with the end result being a sudden realization
that we're not quite out of the woods just yet.
According to Michael Cartine of Thomson/ Reuters “The danger from inflation
comes in from its inherent volatility; when prices rise 3% the first year, 5%
the next, 10% after that, but then stagnate or even drop for a year before
trending higher again. This type of environment becomes increasingly
difficult to make economic decisions in. Market participants around the world
will certainly attest that the last year or so has been a particularly
volatile time."
The FTSE sold off hard, falling further than most other global stock indices
on the week. UK top tier stocks, led by banks and real estate shares, fell on
fears of negative equity in the UK housing market leading to trouble for
banks and consumers. Retailers including Marks and Spencer were being
punished as UK shoppers face the prospect of not being able to bank on
further house price rises to fuel further spending. The bricks and mortar ATM
is no longer paying out.
The plight of UK equities was not helped by that fact that even with oil
hitting $135; UK oil stocks were strangely subdued towards the end of the
week. Oil & gas stocks make up nearly 20% of the FTSE by market
capitalisation. The question remains whether this relative weakness is the
start of a rotation out of this sector, or whether it is just a couple of
days profit taking. Markets gave us a significant ‘tell’ on Thursday as
equities spiked following a natural gas inventory report which indicated
increased levels of storage. Oil fell back and stocks surged in the opposite
direction. Unfortunately, the rally didn't last as crude reaches back to
previous highs. However, the way that markets reacted was certainly telling
and could be an indication of how things will play out when oil finally stops
going up.
Crude oil has now accelerated by 30% in under two months and 80% in a year.
It is little wonder that the MPC voted 8-1 to keep rates on hold with
inflation running so high. However, there are some potential weaknesses in
crude which are worth pointing out. According to Mike Rothman of ISI, global
demand growth for oil is now well below last year's increase. In addition
there are reports of the Gulf being crammed with oil tankers chartered by
oil producing nations to hold oil they cannot sell. This suggests there are
no buyers at this price and when this happens, the laws of supply and demand
come into effect. Goldman's Analyst Arjun N. Murti recently predicted that
oil could hit $150-$200 in the few years. While this prediction may still
come through, there are increasing signs of this oil bubble over stretching.
With bank holidays in both the UK and US, it is a quiet start to next week on
Monday. The most notable release on Tuesday is the US new home sales data
which is expected to show indicated further pain for US home builders. The
only question is the degree of acceleration in this decline, as is expected
to be the case with the UK's Nationwide House Price index released some time
on Wednesday morning. The week's top announcement though is likely to be the
US GDP figures on Thursday as the US economy weighs up the benefits of the
Bush tax rebate against the rising cost of oil.
After experiencing a much needed sell off, there is the potential for the
FTSE to stabilize over the next week said BetOnMarkets.com traders,
especially if (big if) oil manages to go a week without making a new record
high. With that in mind a bull bet on the FTSE to be higher than 5900 on the
9th of June could yield around 19%.
About BetOnMarkets.com:
http://www.BetOnMarkets.com is the world's leading Fixed Odds Financial Trading website. Fully licensed and regulated globally, BetOnMarkets.com handles around 18,000 trades a day, from over 130,000 registered clients. Over 15 million trades have been processed since inception in 2000. The multi-award winning BetOnMarkets.com allows traders to speculate on the movement of the worlds’ major financial markets, up down or sideways without actually owning the market, stock or currency you are buying.
editor@my.regentmarkets.com
Tel: 448003762737
Arts & Entertainment