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June is usually a comparatively quiet month for stock markets. October, on the other hand, is much more volatile. The four great crashes of the last 100 years were 1929, 1987, 2000 and 2008. Three of them happened in October. It's the apparent month of choice for stock market crashes.
However, if the build up and first day's trading are anything to go by, June 2010 is going to be anything but quiet. Here's why.
Why June could be nasty for shares
First, the international picture is dreadful – and getting worse. The UK Centre for Economics and Business Research is now saying Greece should exit the euro. And last Friday, Fitch downgraded Spain's AAA credit rating by a notch to AA+. How long before it's Portugal and Italy? Or even France? On Sunday, French Budget Minister Francois Baroin declared that France should not take its AAA rating for granted.
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But you can't help asking what chance do Greece, Spain, Italy, Portugal, France, the UK or for that matter the US or even Japan really have of paying back their debts? To me this is a sovereign debt crisis that is just getting going.
Then there's the risk of new banking jitters. The ECB has just warned (according to Reuters) that "eurozone banks face up to €195bn (£165bn) in a 'second wave' of potential loan losses over the next 18 months due to the financial crisis, and disclosed it had increased purchases of eurozone government bonds". To put that in some kind of perspective, £165bn is close to the entire amount (£200bn) created by the Bank of England through quantitative easing.
Last week we explained why Europe's banks could be the next flash point for markets. Now the ECB has cottoned on. It means that investors need to be ready for more, and frequent, nasty surprises in the coming months. And that could be bad news for share prices.
Meanwhile, there is growing tension in the money markets. Interbank lending rates – at which banks lend money to each other – are quietly rising. That means bankers are getting more worried that they won't get their cash back when they need it. And the money supply is contracting. In Europe, we see year-on-year falls of 0.1%. In the US, the Fed stopped publishing M3 money supply figures years ago. But according to Shadow Government Statistics – which has worked out what the figure would be – it is falling at a 5% annual rate.
Together, these add up to more risk in the system as we noted in the magazine recently: What the 'fear gauge' is saying about the markets, (if you're not already a subscriber, claim your first three issues free here.) Again, extra risk is something that markets hate.
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I know markets have the ability to ignore bad news if they want to, but there does seem to be rather too much of it about, even after yesterday's surprise announcement from the US Commerce Department that construction spending had risen by the biggest amount in nearly a decade.
What's going on in the stock markets?
The technical action of the stock markets is extremely negative too. In less than a month, almost ten months of gains have been handed back. We are trading at levels seen last September. But what concerns me is the frightening volatility. Just yesterday the FTSE was down by more than 100 points at one stage before rallying. There are huge swings both ways. A day trader's delight it may be, but this is not the action of healthy markets.
Much of yesterday's reversal will have been short covering. I wrote a couple of weeks ago that this is all eerily reminiscent of August-September 2008 (Are we heading for a repeat of the 2008 crash?) and – just my 2p – I would be very wary here if I were long, which I'm not, by any stretch. I can't help thinking we will see opportunities to pick up equities considerably cheaper later in the year.
Here we see the FTSE. The February lows around 5,000 were breached on the FTSE last week, but it has since rallied.
On the S&P 500, the February lows at 1,045 have held. There is more support at 1,025, but if that goes, we'll be back in triple digits before you know it.
It is worth noting that while global stock markets usually rise and fall together, Chinese indices have been tending of late to lead the Western markets by several months. They, like gold, made their low in November 2008, and began a wonderful rally, while Western markets carried on declining into March 2009. The Chinese indices peaked in August 2009 and have been declining ever since. They are back at May-June 2009 levels. It's possible that Chinese markets maybe telling us what's around the corner for the West.
What does this mean for gold?
How will a rough June affect gold, a number of you may be asking. In previous recent downturns gold and, more so, gold shares have sold off. In 2008 they did so quite dramatically.
But in the last month a different pattern seems to be emerging. While the action in the cash-reliant junior explorers is not encouraging at all and many are now in a downtrend, gold seems to be holding around the $1,200 mark. There are reports that in Greece gold sovereigns are changing hands at some 50% above the spot gold rate. Of note is that gold has decoupled from the euro altogether and now seems to a certain extent to be rising and falling with the dollar. This is encouraging as it suggests money is fleeing to it. This may or may not continue short term. But I'm confident that in a year's time, we'll be notably higher than we are now.
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Dominic Frisby
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