Markets Rate Cut Enthusiasm Maybe Short lived
Stock-Markets / Financial Markets Sep 24, 2007 - 03:21 AM GMTBy: Regent_Markets
Many traders will be breathing a heavy sigh of relief this week as the economic calendar lightens comparatively. The US interest rate decision weighed heavily on trading action last week. The FOMC announcement had top billing and it certainly didn't disappoint. Many analysts were expecting a 25 base point cut, with much speculation on when the next cut would be. The 50 base point cut took many by surprise and the market reacted with typical enthusiasm.
Bernake and Co became the heroes of the hour on Wall Street, with them seemingly averting the credit crunch and saving the day. The Dow Jones rose 2.5% on Tuesday, and the following day, the Nasdaq 100 came within 4 points of its July peak. Crisis, what crisis? In fact some commentators are now labeling the latest concerns a faux credit crunch.
The decision has sparked some strong movement in the currency market with the Dollar falling hard against the Euro. The Euro remained strong across the board with the ECB maintaining their tightening bias. The Loonie, as the US Dollar/ Canadian Dollar exchange rate is called, fell hard due in part to the rise in oil prices. The USD and CAD are now standing at parity (1USD = 1 CAD), the lowest levels for well over 30 years.
Over in the UK, the queues outside Northern rock disappeared as the Government and Bank of England intervened with various measures and reassurances, aimed to calm jittery investors and savers. Next week is a relatively lighter week on the economic news front. Notable announcements are the US existing home sales on Wednesday, and new home sales on Thursday. With the US housing market being at the forefront of the current situation, this data could bring fresh perspective on the intermediate future. Although it is too soon for the recent rate cut to have any impact, Wednesday's core durable goods orders and Friday's PCE price index will give clues as to the implications of the 50 base point cut.
Opinions on the Fed's rate cut have been mixed, with Wall Street enjoying the move and some economists questioning its wisdom. As the impact of the announcement settles down, some are questioning what the Fed knows, that the rest of us don't. What was it that spooked the Fed into a half point cut?
The implications are that the large cut was made because of the state of the economy, particularly the housing market and job growth.
Last Friday saw options expiration day, and according to research from www.sentimentrader.com, since 1990, the week following options expiration in September has shown a positive return on the S&P 500 just 2 out of the last 17 times. Taking out the week following 9/11, the average return for the week is -1.3% with the maximum gain being +0.6. One must always take such seasonality studies with a pinch of salt, but coupled with the dramatic rise we saw on one day last week, it could lend credence to the argument that we're short term over bought on the US markets. A no touch trade, 90 points higher on the S&P, returns around 7% over 14 days. This means that as long as the market rallies slowly, stays still, or drops, you win.
You may also wish to have a look at BetOnMarkets.com's new Double Contra which pays out if the market never touches the two barriers you set above and below the current price. If it touches just one or neither of these you win. If volatility reduces during the relatively news light week, it could be an interesting play, particularly if you weight it to the downside.
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