Margin Debt Shows More Selling Ahead

Jason, i mentioned in this latest piece that USDJPYto drop below 100 this month. It is already doing it. if they end upnot not cutting before Oct 29, we could see 95 before end of month. The central banks are out of amunition and so are the governments regardless of billions they spill on the problem. Rate cuts will only help ease the damage in the market but not get rid of it. we dont even know the magnitude of redemption notices by hedge fund clients, and further collapses of funds and so on... NIKKEI as we speak DROPS 9%, BIGGEST ONE DAY POINT DECLINE SINCE 1987.

Steve,

The UK govt package may prop cable to as high as $1.7650, 1.7750 but this will quickly be deflated by expectations of a rate cut on Thursday. NOW BE CAREFUL HERE: If they do 50 bps, we may see the same effect after the Aussie's 100 bp rate cut whose shortterm effect was AUD negative, but the positive impact on risk appetite and global stocks boosted high yielding currencies such as the Aussie vs JPY, USD etcc later in Asian and European session. 25-bp rate cut will be very negative for GBP. 50-bps on Thursday may have shortterm negative GBP impact, before a modest positive reaction. In summary, The ONLY WAY TO SEE GBPUSD CROSS ABOVE $1.78 IS DUE TO i) some really negative US-centric event such as a failure of a US bank ii) coordinated rate cuts by global central banks iii) or an intermerting Fed cut that not joined by ECB or BoE. My bias on Cable remains negative and any shortterm gains are a sell opportunity. Maintain LOW margin usage with cable.

Jason,
Yes, partly yes. markets are pricing a Fed cut of 50 bps by Ooctober but they seem to be losing faith in an intermeeting cut or coordinated rate cuts, which if delivered, may produce a rally of no more than 2-3 days long. You and me have long discussed about the shortlived effect of those past interventions in AIG and Fannie/Freddie. When markets make their mind up about selling and the data picture us moving from bad to worse, very little can be done to stem the damage. In terms of time, it will take at least 18 months. In terms of magnitude, another 20-25% decline, as these charts indicate.

Nick,
The market declines may take another 18 months in the form of consolidation, false rebounds in the magnitude of about 7%-10%. Look at the S&P monthly chart above had several false recoveries in 2001 and 2002. As for the dollar, we could see 1.3350 in EURUSD, $1.7050s in cable, but 97-99 in USDJPY. EURUSD bottom unlikely to be finally reached until Q1 2009.