May 25th 2010 – A Spaniard in the works

John Lennon, from whose book I have plagiarised this week’s title, would have approved of the current “anarchy” in the markets. He was fond of nonsense and there is certainly a lot of that around at the moment. Who are the anarchists? The speculative “wolf packs”, the all knowing governments or the self serving central banks? And just who is manipulating whom and what and when and how often?

Markets plunge in minutes, stocks fall to one penny and then as quickly they rise again. Currencies are no less volatile as central banks intervene one day only for the markets to ignore them the next. Long bond yields are at significant lows (US 10 year 3.1%, Germany 2.5% and even the much derided gilt 3.4%!) while gold is close to its all time high.

The flight to quality has taken off and is stuck on autopilot while the doughty aeronauts ponder how high government bond prices will take them before they have to try and land the thing. Equity markets are torn between worrying about which will be the next significant bank to fail and the probability of North Korea, or South for that matter, “glowing in the dark”. On top of that the Germans have banned naked short selling on sovereign CDS’s and selected banks and are threatening to extend the ban to all stocks traded in Germany.

In the US a financial regulatory bill has passed through the Senate and Congress, but they are both different! Sad but true! And now Tim Geithner, the Secretary of State for the US Treasury is in Europe telling Trichet, Sarkozy and Merkel how much it’s going to cost to have the Fed bail them out to get their act together.

With so much uncertainty why are we surprised that the markets have taken umbrage? The bad news is “coming through in waves” leaving us all “uncomfortably numb”. Since the April peak we have had one “decent” rally but this was pretty much a one day wonder followed by a few tentative higher plots on low volume before the downtrend kicked in again.

We need to see a good two to three days of strong up moves on significant volume before calling an end to this downtrend, but the news from the Iberian peninsula suggests there is going to be a Spaniard or two in the works, and the real relief rally may have to wait a little while yet.