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BetOnMarkets view on Interest Rates

Written by Joanna Frendo
Tuesday, 04 September 2007
Yet another interesting week and indeed month on the stock market is behind us. Markets continue to crash on bad news and then rally the next day on good news. The bad news? Well theres plenty of that. Barclays bank in the UK was forced to tap the Bank of Englands emergency lending facility at 1% above the base rate to the tune of £1.6bn. This has been explained as being due to a technical failure, but coupled with resignation of the chief of BarCap many people are questioning the financial stability of major financial institutions. Barclays put their losses due to investments in debt vehicles at just £75 million, but many in the city are skeptical that this is all there is. The complicated nature of these debt vehicles means that it is difficult to know exactly how much exposure there is. The Case-Shiller housing numbers pointed to a severe down turn in the US housing market. The US housing market is usually regional with different areas experiencing booms and busts at different times. This is the first time in a while that all 10 cities measured were found to be in decline. The good news? The market rallied last week in part due to a letter from Fed Chairman Bernake to Senator Chuck Schumer. The part that got investors excited is as follows: "FOMC has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." It is worth noting however that while these comments may be reassuring, there is no concrete confirmation that the Fed will act by cutting rates. Bernakes later statement on Friday kept the same open line, but inferred that a rate cut was at least possible. second piece of good news was the Wall Street Journal announcement that George Bush said that the US government will be outlining initiatives and reforms to help subprime mortgage homeowners. On closer reading however the deal may not be as wide ranging as many people interpreted it to be. As ever, more information and interpretation will come out in the wash. NFP data will headline next week, but jobless claims will also be a heavy announcement particularly as the FOMC inferred it will be paying close attention to very recent data. Aside from a surprise rate cut from the US, the main action next week will come from European interest rates with both the MPC and ECB making rate announcements. The MPC are a racing certainty to announce no change, but the ECB could still surprise. They too are expected to keep rates on hold, but there is still a chance that they might upset Sarkozy with a rate hike. Most traders who were away on vacation and those who sold in May (as the old adage goes) were coming back as it was coming up to labor-day last week. This infusion of more cash can create two situations: 1) It could prop up the market as there will be more buyers, who didnt suffer the losses of the month of August. 2) More sellers as rather than going long, they will short the market and increase the market fall. This could present the markets with a further injection of volatility which could be profitable for the short term trader. For that you might want to use an up and down play on the sp500 over 11 days, and 45 points each way, which returns around 12%ROI. Alternatively you could make a no rate cut play and place a no touch above the previous highs on the S&P500 due to expire before the next FOMC interest announcement on the 16th. Most traders who were away on vacation and those who sold in May (as the old adage goes) were coming back as it was coming up to labor-day last week. This infusion of more cash can create two situations: 1) It could prop up the market as there will be more buyers, who didnt suffer the losses of the month of August. 2) More sellers as rather than going long, they will short the market and increase the market fall. This could present the markets with a further injection of volatility which could be profitable for the short term trader. For that you might want to use an up and down play on the sp500 over 11 days, and 45 points each way, which returns around 12%ROI. Alternatively you could make a no rate cut play and place a no touch above the previous highs on the S&P500 due to expire before the next FOMC interest announcement on the 16th. Bookmark with: Delicious Digg reddit Facebook StumbleUpon What are these?

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