As imminent devaluation of Dollars on sight due to another possible one Trillions stimulus plan, so another Rally on World Equities due to the Liquidity-fed Markets cannot be discarded. All cash will rush into Equities
In Short, even though the U.S. economy remains weak, there are still improvements taking place, albeit very modest. Additionally, market participants are taking some solace in the fact that despite the weakness, the indicators are not showing an economy on the brink of collapsing, if the U.S. economy shows signs of improvement, stocks' prices would rise. Additionally, if the Federal Reserve were to add more stimuli to the economy, stocks would still rise.
2) On Commodities
The devalued Dollars will further feed the demand for Hard Assets. Gold and Silver will be lifted to another historical high (Gold may hit 1350-1400, and silver may breach 25.00)
Crude oil will also break through multi-week resistance despite the highest ever recorded US inventories (Crude may retest 79.00--80.00 level near term)
Gold is a currency hedge priced in US dollars and thus its rise suggests fear of loss of value of the USD. US Treasury bonds are a safe-haven asset and partial bet on the USD as a store of value, and hedge against riskier assets like stocks.The two move in opposite directions. Either the USD is in trouble and gold should be higher, or Treasuries are the right bet and gold should be lower. Over time, one of these trends must reverse.
Crude oil prices, which have been shadowing the equity markets for some time now, followed accordingly and traded to the upper end of its trading range. Nonetheless, investors remain cognizant of the fact that inventories are at the highest levels seen in about 30 years. By and large, the technical resistance point for oil appears to be the $76 per barrel area.
3) Forex
The further weakening of the Dollars will drive the USD index to its lowest level in months, and the possibility of retesting its Low near 74.20 ( recorded on NOV,2009) is possible near term, with predictable results.
- The USD was the last week’s weakest currency
- The EUR was the strongest, despite news of deteriorating PIIGS bond prices and EU growth which together at other times could have put the EUR at the bottom of the weekly forex pile.
- The move virtually wiped out the nascent downtrend in the USDJPY that the Bank of Japan has been trying so hard to engineer.
UP-COMING WEEK
US stimulus cash is more likely to wind up fueling emerging market growth as US companies deploy the cheap cash to markets with lower labor costs and faster consumer spending growth rates.
While it’s questionable whether the Fed can truly prevent future inflation by sopping up excess liquidity at just the right time, it certainly risks further loss of confidence in the USD and thus America’s ability to continue selling bonds at such low rates. That would be a greater problem, given America’s dependence on its bond sales to fund its own operations. With debt levels already at 93% of GDP, even a small increase in borrowing costs could become a crippling burden.
Is the Weakness in Euros imminent ?
Last week, the strong Euros was actually driven by the relatively weakened Dollars, not caused by Any Fundamental improvements.
In fact the week’s news was mostly negative for the EUR with rising PIIGS bond/CDS rates, Irish banking trouble, lackluster manufacturing and services PMIs. Thus as long as the two most widely held currencies fundamentally weakening, anything seen as a currency hedge with decent fundamentals like precious metals or grains/ coffee/ cotton are benefiting.
Will EUROS/USD reverse, and retest 1.3000 in upcoming week ??
There is plenty of potential for a reversal lower with the EUR.
- As noted above, most of the EUR gains are from USD weakness, which was likely overdone last week.
- PIIGS bond sales went off but were at high rates and even those ‘successes’ may turn out to be from ECB purchases.
- Spain will try to pass new austerity measures in the coming week. The last one passed by only one vote.
- Recent data suggest EU growth may be slowing. If the EU growth advantage is seen as fading, so will the EURUSD.
Note:
EU Sovereign Debt/Banking Crisis: Unlikely to spark more than short term drops as long as ECB can continue to ‘manage’ PIIGS bond auctions so that they succeed, and the focus remains on weak US data rather than on weak EU data.
The big question is, how long can the ECB continue to buy PIIGS bonds to keep auctions successful without its own new QE, and concomitant hit to the EUR?
Again, ratification of new Spanish austerity measures could be the next EU crisis eruption, as it could raise questions about long term commitments to austerity elsewhere in the EU as well as in Spain.
On GBP/USD outlook , it may retest 1.5450 near term ??
Further Evidence of UK Weakness Could Pressure GBP
Recent UK data has been weak and MPC minutes suggest openness to more QE, even as a BoE economist stated that if inflation becomes a problem an aggressive rate hike may be forthcoming. We believe the UK, like most democracies, will risk inflation over another recession.
ON YEN MOVEMENTS
Currency intervention will remain front and center, along with tensions with China in the East China Sea. In addition, Japan will release its Tankan report on UPCOMING Wednesday, which, while usually a highlight in the region, the latest survey of thousands of companies that goes into the Tankan results were made before the Bank of Japan launched its currency intervention, so the results could be viewed by market participants as somewhat 'stale'.
We may see USD/JPY retest 82.00 near term.
We may see USD/JPY retest 82.00 near term.
As such, we must be careful on trading the YEN crosses in upcoming week due to the likelihood of further Currency intervention by BOJ.
Conclusion
The overall tone of markets in upcoming weeks months will be marked more by 'choppiness' than by any smooth trend. In such conditions, examining the market's response to data and discriminating between "over-reactions" vs "game-changers" is even more challenging, but vital.
As always, each investor will weigh the set of data that he/she finds most compelling and will decide appropriate investment responses based on his/her unique financial profile and risk tolerance.
As always, each investor will weigh the set of data that he/she finds most compelling and will decide appropriate investment responses based on his/her unique financial profile and risk tolerance.
Happy trading
