What a run into the final few days of the year, after yesterdays continued rout equity markets started the day in a nervous fashion once again, the Chinese manufacturing data coming in slightly below expectations not helping. As the morning wore on markets in Europe tried to bounce but then started to drift once again, and a repeat of the past few days seemed on the cards. Sentiment suddenly changed as the Brent crude oil price briefly jumped back above $60, and equity markets spiked. The FTSE 100 traded in a 3% range closing the day up over 2%, as did the Dax index of leading German companies. The S&P 500 itself traded in a range of over 2%, closing marginally lower at the bottom end of the range. The stock market has the ability to play with the nerves and now is a prime example. With so much uncertainty about and traders pretty squared up for the year end this may not be the end of the volatility, particularly with the Federal Reserve meeting tomorrow and analysts looking for any potential change in interest rate guidance. The Vix certainly gave that impression ending the day higher, close to the levels of mid October.
A lot of headlines in the UK were made from the release of the latest bank stress tests first thing in the day. One rather feels that stress tests are a useful academic exercise but unsure what they achieve in reality. It came as no surprise the COOP remains somewhat of a basket case, as for Lloyds and RBS the government continues to own major stakes in both banks and therefore one assumes would once again be forced into offering support in times of stress. Banks of the size of Lloyds and RBS are now too big to fail, what these stress tests confirm what a difficult position they remain in. On the one hand encouraged to lend, and on the other hand told by the same authority that they need to reinforce their balance sheets.
Merrill Lynch released its latest fund manager survey, and as always it makes interesting reading to see how the portfolio managers admit to being positioned. Cash remains at higher than traditional levels, as has been the case for a while, suggesting fund managers remain cautious. Fund managers also appear very overweight European equities, apparently anticipating the ECB to finally move to QE.