Market Summary for the Option Trader
MARKET SUMMARY – WEEK 11 2008
By: Marcelo Tames
Every week that ends, more and more people give up about the economy of the United States. This week was characterized by many records in different markets as a mixture of good and bad statistics produced nothing more than fear for worse things among investors.
In the currency market the US dollar is diving into new lows against the euro in the neighborhood of 1.57 $/Euro and in relation to the Japanese Yen, it came to be below 100 Yen/$. In the raw materials market, oil got to be 111$/barrel due to a weak dollar and another record was registered by gold which surpassed the psychological price of 1000$/ounce.
If we talk about the stock market, shares dropped for third consecutive week with an awful start on Monday when S&P 500 and the NASDAQ reached levels from 2006, things looked to change the following days when stock bounced from those low levels and struggled to cut the bad patch. The unemployment data helped to this desire since it was little changed from the previous week and usually investors consider this figure as a core measure to see the health of the economy, although in this bear market now any statistic seems to be considered no less important than another. The big bad news came on Friday caused by an external event which nobody expected. This week protagonist is called Bear Stearns Co. which needed emergency funding from the Federal Reserve and JPMorgan in the largest government bailout of a U.S. securities firm. The worst part was that early in the week the CEO of Bear Stearns Co., Alan Schwartz, said that the firm was solid and didn´t have liquidity problems but on Friday investors suffered a big shake first because the core inflation index was unchanged from the previous month which gave some hope that not everything was too bad and the FED could still cut rates not worrying too much about inflation, but just after that good humor injection to the markets the news about Bear Stearns came and the speech from Alan Schwartz didn´t convince the speculators since he said that the company's cash position had “significantly deteriorated'' in the past 24 hours, Bear Stearns's long-term counterparty credit rating was reduced three levels to BBB by Standard & Poor's and it will be no surprise that other financial firms will follow suit.
Ben Bernanke’s Federal Reserve provided part of the necessary funds showing that it is monitoring closely the events in the financial markets. The effect on the markets was negative and many of the records were registered on Friday´s session. What investors fear is that the FED is only pumping money into the markets which now seems to be too much and that action may deteriorate significantly the dollar and therefore the whole economy not forgetting also that these actions will spark inflation to a higher level.
The economy deteriorates more every day, more and more foreclosures give more mortgage headaches and now people with good credit backgrounds find it hard to get a traditional mortgage thanks to the huge losses of Freddie Mac and Fannie Mae. We appreciated that the effects of the credit crunch have already spread to the number of unemployed people and also to sales which are lower not surprisingly since prices go up due to higher than ever oil prices as one of the reasons.
Two things can happen next week. Either the markets will melt down or have a rest on the down trend since on March 18th Ben Bernanke will be in focus when he reveals the interest rates. The market expected first a 75 basis points rate cut but now the majority goes for 50 basis points although now the market doesn´t know what it wants since they know that lower rates boost inflation and what markets want to avoid is the ghost of stagflation which would lead to a more severe economic downturn. To consider also during the week is that it comes full of statistics related to housing and on Friday banks around the world will be closed in observance of Good Friday. US and Japanese banks will remain open and low liquidity is expected for all Forex sessions.