Today’s rally has helped ensure that October 2008 is spared the embarrassment of being one of the worst months on record, but we are far from being out of the woods yet. Since September there have been two rallies of today’s magnitude on the FTSE and in each case, the gains were wiped out in just over week. October 13ths big rally promised much but the day’s gains were reversed within just three days. Although October could mark an intermediate term low point, it is highly unlikely that it will be plain sailing from here. What is more likely over the next 3-6 months is continued volatility with many more days rising or falling by 5%. If (big if) we can get some follow on buying from here over the next week or so, we could continue to back and fill higher over the next few months.
Before this can happen, markets face a very harsh test with the US interest rate decision this evening. Currently a cut down to 1% is the most likely scenario, though some are calling for a cut down to 0.75%. Although this may happen eventually, we believe that a cut greater than 0.5% this month is less likely than people think. The continued improvements in the credit markets are a factor, the Fed may fear using up all their bullets too soon as Japan did after their economic boom turned to bust in the 80s and 90s. When rates reach 0% there is nowhere else to go.
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