Negative tone prevails as markets face testing week

AFTER another volatile week, anyone hoping that a belated summer lull might be on the way, perhaps to lick wounds and assess trading strategies, will be disappointed for now. This morning’s opening call is for another one per cent drop on the UK stock market, tumbling back below the 5,000 level, and with alarm bells still ringing over sovereign debt and a potential global double-dip recession looming, it wouldn’t be unreasonable to say there is a whole lot more volatility on the way.

GFT quotes two-way prices on stock indices around the clock, even when the underlying markets are closed.

The FTSE 100 index is called to open down around 45 points at 4,995. The German DAX is forecast to open down 58 points at 5,422 – and the French CAC 40 is quoted down 28 points at 2,988.

This could be a big week for the technical analysts and chartists out there.

In addition to the FTSE and the CAC are testing substantial levels of psychological support (5,000 and 3,000 respectively), the S&P 500 index in the US is also testing support at 1,120.

Many technicians see the 1,120 to 1,130 range on the S&P as a major threshold to be watched, believing that a break through this level – which incidentally was also a big level of resistance to the upside last year – could herald massive declines in stocks.

The index closed perilously close at 1,123 on Friday, down nearly 18 per cent from its 2011 high.

Market participants will face an anxious wait ahead of the Federal Reserve’s annual meeting in Wyoming on Friday, where chairman Ben Bernanke’s speech will be scrutinised for clues of further monetary easing.

It was at this very meeting and venue last year that Bernanke first raised the concept of so-called QE2; hopes have been building that this time we’ll see the birth of QE3.

However, much more likely is the simple reiteration of the latest FOMC statement – holding interest rates low well into 2013 – and laying out of the policy options available, without actually committing to any new initiatives.

Hence the potential for more disappointment in the markets to end what looks to be another testing week.