Ashraf on US equity indices (FT)

2008.01.28:

View of the day: US equity indices

Published: January 28 2008

One essential indicator for the future performance of US equity indices is the aggregate margin debt used by member firms of the New York Stock Exchange, says Ashraf Laidi, chief foreign exchange strategist at CMC Markets US.

He says rapid declines in margin debt correctly predicted the prolonged bear markets in equities in autumn 1987, autumn 1998 and spring 2000.

Such declines in debt result from the execution of margin calls as client losses escalate to unsustainable levels, which is the case during mounting market volatility.

Mr Laidi says that after reaching a record high of $381bn in July last year, member firms margin use declined for the following four months, reaching a low of $322bn in December.

"This suggests that continued losses are due in the market, which is consistent with our expectations for a prolonged bear market in equities, he says".

"The 12-15 per cent declines in stocks we predicted back in December are already under way.
We expect another 15-25 per cent of declines to come by end of the first half as the macroeconomic deterioration coupled with prolonged losses in US banks and profit warnings will overwhelm the easing measures of the Fed".

"Incorporating this outlook to currencies, continued risk reduction should maintain the yen as the key beneficiary of falling risk appetite and unwinding of carry trades".