The bear hug begins?

September was no exception to a year that has consistently defied old adages, with markets closing up over 4% in a month historically known for having the worst monthly performance in a calendar year.

The September movement topped off the markets' biggest quarterly rally in over a decade in which the S&P 500 jumped 14%, building on a 15% rally in the April to June period. Similarly the FTSE had its best three-month return in over 25 years, gaining over 21% since the end of June. This global market rally has proceeded on the back of almost limitless government liquidity and seemingly boundless investor confidence.

However the equity rally appeared finally to stall towards the end of last week. This was fuelled by weaker than expected consumer confidence and bearish comments from former US Federal Reserve chairman Alan Greenspan.

Wednesday saw a sharp decline in US indices due to weaker than expected Chicago PMI. Economists were expecting a level of 52, but the actual level came in well below that at 46.1. A fall of approximately 120 points in the S&P followed this data, illustrating just how important economic news is at the moment.

It wasn't all bad news though, with the IMF lifting its global economy forecasts and now expecting 3.1% growth in Q2. The IMF's Dominic Strauss-Kahn said a double-dip recession is possible but is not the most likely scenario. He added that although growth is resuming in most countries, the crisis is not over yet. The IMF also cut its projection for global write-down on loans and investments by 15% to $3.4 trillion, citing improvements in credit markets and initial signs of economic growth.

So where next for equities? Can the record-breaking rally of the third quarter really be sustained? One must remember that in March, the world faced the possibility of another Great Depression, whereas now the market is pricing in a relatively quick move out of recession and return to normality. Therefore shares are looking expensive on some basic measures such as price/earnings. If earning improvements don't materialise, a significant fall can be expected.

This week sees the beginning of third-quarter earnings season with Alcoa being the first company in the Dow Jones to release its figures, set for Wednesday 7 October. This data will set the tone for the market's ability to move forward or fall from its current lofty level.

An interesting trade last week was CIT group: the ill-fated commercial lender spiked over 32 % to $2.19 on Tuesday only to slump over 36% on Wednesday as it announced plans that would likely hand control of the company to its bond-holders. The are fears that the company may be forced to file for bankruptcy. If CIT does file, it would be the fifth-largest bankruptcy filing in US history.

Notwithstanding the risks, volatility such as this illustrates the benefits of spread betting as clients can profit from both upward and downward movements in a short period. This news weighed down the US financials, with all the major banks closing the day down on Wednesday.

Wacky Wednesday

We mentioned last Sunday that a break of $67/bbl on the US light crude contract would be quite important, and we gave a target of $63/bbl with a "brief" hurdle along the way at $65. The $65/bbl level ended up being more of a brick wall than brief hurdle as the market failed to make any sort of impression below it last week.

Once again the oil price action was at its most dramatic on Wednesday. Prices rose an incredible 5%, finishing above $70 on the back of very little news. Yes, the weekly oil inventories did somewhat spark the rally but there was nothing really in the data that could justify the upward move that ensued. The move above the 100-day moving average was talked about as a possible reason.

For once, though, it wasn't the weak dollar or strong equities pulling up oil but very much the opposite. In fact the equity markets were very weak on Wednesday, and the dollar was quite strong, but the oil rally couldn't be ignored and eventually the equity and forex markets turned around.

However, over the week the dollar has generally been quite strong, while commodities have also been fairly strong. Gold, for example, is back above $1,000, with silver trading back in the high $16 mark. While the future medium to longer-term direction for the commoditised markets may be uncertain, the intra-day volatility is providing plenty of opportunities to day-trade and make significant profits, especially in the oil markets.

EUR/GBP has also caught our eye once again, since our rather bullish comments on 30 August. We placed a target then of £0.90, which was hit on 18 September. The market continued to trade higher reaching a peak of £0.9256. It's now trading at approximately £0.91 and the technical indicators are showing signs of a potential pullback lower; the RSI (relative strength index) has entered overbought territory and the popular MACD indicator looks like it's going to indicate a 'sell' signal. We could see a fall to £0.8950 in the coming weeks.

Grace Smith & Vinay Sharma, Delta Index