Global Stock Market Sell Off and Extreme Volatility

Oct. 15, 2008 - PRLog -- It could be argued that even with the wild gyrations of the past few months, many were still in denial about the state of the financial markets. Last week, fear was rife as traders, investors, and the man on the street could no longer deny the magnitude of the global sell off. Some commentators are referring to it as the great crash of 2008. Certainly, there have been bigger one day falls in percentage terms, but the scale and unyielding nature of the October's sell off of is unique. You only had to take your eyes off a market like the Dow Jones for a second, and it will have moved 100 points in either direction. This level of volatility is almost unheard of. For days markets have continued to show signs of complete surrender, days that may have become capitulation low points in the past, yet the sell off still continued. People looking for the bounce that often follows such waterfall sell offs, have so far unfortunately been too early and quite wrong.

The VIX options volatility index, often referred to as the 'fear gauge', has spiked to levels even higher than those registered during the height of the dotcom bubble collapse. This is a broad decline with no one sector out on its own in leading declines. Financials are down of course, but so too is the energy sector, as oil continues to break down. Last year around the quiet period and intermediate high of August, the FTSE had a daily range of around 60 points. Last week it was moving that much every 15 minutes. These are extraordinary times and many technical indicators are flashing at levels never seen before. At best, central governments are hoping that the coordinated rate bomb and localized interventions have stopped Armageddon, there is now no hope of the UK, US, Irish and Spanish economies avoiding recession.

Next week's planned economic announcements will continue to play second fiddle to the shocks and surprises that await us all. US financials will be grateful for Monday's Columbus Day bank holiday, though the stock market is still open. Aside from this, there are important announcements from the UK to start the week with PPI input on Monday and CPI on Tuesday. Wednesday brings a raft of US data with US PPI and retail sales. Bernanke is also due to speak on in the late afternoon.

Although the sub prime mess originated in the US, this has always been a global credit crunch. European banks were some of the biggest buyers of sub prime securities, so when the crisis developed, any one of the world's major banks could have been holding toxic assets. This in turn led us to the historical coordinated action by the world's central banks today. Each government has attempted to deal with the crisis with specific interventions in their area but all eyes are on this weekend's G7 conference for further coordinated international activity.

It could be argued that Britain and the US have been able to take more significant moves because they have their own central bank and perhaps crucially a central treasury, something the Eurozone lacks. With problems in Ireland, Spain, Greece and Italy increasing, the pace of a recession across the Eurozone could run at different speeds, as did the preceding period of growth. The differing needs of each individual state could put further pressure on the Euro against the Dollar. The Dollar has recovered 16% from the lows back in March.

Betonmarkets now offer long term trades lasting a year and this could be ideal for currency moves. A one touch trade on the EUR/ USD to touch the 2005 lows of 1.16 in the next 12 months could return 117%.

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