Finally a bit of excitement as bears flexed their muscles once again.

Our comment yesterday that the markets appeared to be finding it difficult to regain positive momentum came to fruition big time as profit taking became the order of the day. As mentioned our clients were buying in to the early weakness and that remained the story of the whole session as traders continued to try to pick a bottom only to be bashed out as the markets tumbled.

The FTSE ended the day 150 points lower with another 30 points taken off ‘after hours’ as the US markets also failed to regain the front foot. This made for the worst session in eight months for the markets (which is actually quite surprising) and, given the big bear move from January to March, is actually the third worst this year.

Traders seem confident this morning that this fall was the shake-out they have been waiting for and we are seeing further buying across most of our quoted instruments. It is very tempting to agree with this analysis but we must always beware the sucker rally as ‘bottom pickers’ attempt to create a support only to be squeezed out with a secondary tranche of weakness. There is actually a good support level at 5040 going back to September’s price action as the price first acted as resistance and then as support. The only reason it was breached was due to the ‘October effect’ on the first day of this month and once the market had regained the level the reaction was an immediate move back up to the mid 5100’s. So investors will be hoping that we remain above this mark at the close this afternoon. For the bears there are quite a few targets to aim for with 5000 being the most obvious, longer term the rising trend lines from March give leeway for a much greater retracement to around 4700 but we would probably really need to see some ‘actively’ bad news for this to happen.

At 0930 today we have the UK M4 numbers and these have been one of the pieces of data that are currently worrying this commentator. For all of the huge liquidity injections from the BOE M4 is juddering to a halt (as it is in Europe). Without QE we must speculate that the data would actually be negative, hardly conducive to economic growth. The EU rulings over the break up of ING bank are also likely to hamper any growth in this area as Lloyds and RBS continue to try to take cash out of the system in rights issues etc. If these two Goliaths in the UK lending arena are forced to split up then the sum of all their parts would require substantially more capital than the whole, once again restricting lending in the short to medium term. Longer term, of course, more competition would be good for borrowers but the words ‘long term’ seem quite a way down the road just about now.

In the currency markets our fears over the last week or so that the Euro was looking a tad too overbought bore fruit as well. The currency has now fallen over three cents in the last few sessions down to 1.4730 as I write. Bears are looking for a return to the 1.43 level bulls for a quick return to the highs. As mentioned a few days ago the markets all seemed to be trading in tandem with the Euro. Strong Euro strong markets. The sell off in the Euro has now gone hand in hand with weakness in Equities, Gold, Oil etc. As mentioned this is mad but … what else can we add. In fact if we overlay the Eur/Usd on the FTSE chart since the start of the year the similarities are rather unnerving.

The Dollar is suddenly looking to be rather a cuddly currency once more as the incessant bear commentary seems to have finally run its course. At this point everyone who wants to be short of Dollars probably already is. The ECB has so far kept its powder dry in any attempt to oppose the continued strength in the Euro but they may well be looking at the current bout of weakness as a good point to nudge the currency themselves. Central banks have learned their lesson over the past 20 years that there is no point in trying to stand in the way of an express train when attempting intervention, it is far better to await a small correction when position holders are already a bit nervous and then come in with a programme.

Sterling is also taking some comfort from the failure to make new lows in the most recent sell off. A week or so ago most commentators would have been speculating on a swift return to the 1.40’s versus the dollar after the Pound dropped off a cliff in the back end of September (and then again on the disastrous GDP data) but the contrary seems to be occurring with sellers running out of steam first at 1.5750 earlier in the month and then at 1.6250 in the last few days. No matter what the data Sterling remains stuck, in the main, between 1.6000 and 1.6650. We have had an attempt higher to 1.70 and the recent push lower to 1.5750 but the gravitational pull of the 1.6325 mid point seems too great to overcome.

Oil sold off dramatically yesterday in line with everything else and this was odd as the inventories were actually weaker than expected. If there is a reaction rally in equities today we can expect a matching move in the Black Stuff but overall the momentum still remains to the upside. It must be added, though, that the speed of the rally over the last month has left room on the downside for further corrections within the overall bull move so traders must beware getting too over enthusiastic.