The Financial Markets For 2009

By: Robert Thomas
To bet or not to bet, that is the question. Actually it’s not the question. Should we be spread betting on the markets to go up or down in 2009? That is what needs answering.

Looking at the housing market, whilst UK house prices saw big falls throughout 2008, the trend looks set to continue in 2009. We will not see prices stabilise until they come back to the levels of affordability for first time buyers. On top of this we need to see mortgage lenders willing to give out attractive deals and entice buyers back in. Until then, any buyers out there will continue to offer around 10-15% below asking prices.
Whilst the current series of interest rate cuts from the Bank of England are designed to stimulate the economy and encourage lending they are almost having the reverse effect. Banks have to lend their money for next to nothing, still with the risk that they could not see it again. That causes more problems for the banks. Like it or not, they are central to the whole economy.

Looking at the FTSE 100, there was an interesting rise in the stock market over the festive period and start of 2009. The FTSE then gave much of the gain back and then some more. Again, the 4700 highs in November 2008 proved to be something of a psychological barrier for traders.

The interest rate cutting approach also appears to have lost any previous effect. Although more cuts are expected in the months to come, with banks still reluctant to take on the risk of additional lending it seems unlikely that the base rate is going to be the magic wand that staves off any further economic slowdown.

This does not mean that it is all necessarily doom and gloom for the financial markets. The main index is around 15-20% above last year’s low. So how much of the recession has already been factored into share prices? Perhaps not all of it.

The minutes from the last Federal Reserve meeting revealed their concern over the outlook for the US economy, citing that there are still considerable risks to any recovery.

This was highlighted in the US employment figures. These showed that just over half a million Americans lost their jobs in December, broadly in line with expectations. That is a jump to a fifteen year high and made 2008 the worst year for Non-farm payroll losses since 1945.

Initially this news was greeted with some relief that expectations had not been far too optimistic. Another 500,000 jobs is a lot of bad news priced into the markets. However, as the day went on, US markets turned lower and dragged down the rest of the world indices.

Whilst the unemployment number was in line with expectations, it does show the continuing dire state of the US economy. With a bit of time to digest the facts, the markets came to the conclusion that ongoing job losses of this magnitude could be the order of the day for some time.

It would be vastly optimistic to hope that this trend is going to change any time soon. The jury is still out on how much of this dismal outlook is already factored into share prices.

Nevertheless, bearing in mind that stock indices have bounced back by around 15-20% off the November lows, it is not too surprising that many have taken the view that significant upside for shares looks limited for the short-term at least.
Note that spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.