Nice bounce back last week for equities x/emerging markets. The Russell and Nasdaq were up 3 percent with the S&P500 and Dow increasing over 2 percent. France continued its run and is now up almost 6 ½ percent for the year. Asia was out most of the week on holiday. Brazil and India continued to get hammered, both down over 2 percent for the week. Money is clearly coming out of emerging equities and there just doesn’t seem to be any sellers of U.S. equities to feed the shorts and those looking for a correction.
Furthermore, U.S. equity markets are not giving the under invested much of a chance to get in. This is not surprising given the behavior of Presidential Stock Cycle. The third year of the first Presidential term is usually a straight shot up and has, on average, generated a 22 percent annual return since 1955. We, in hindsight, got overly cautious last week on the Egypt noise and didn’t benefit as much from last week’s bounce back. This is the cost of risk management in trading, however.
The brighter outlook for the developed economies continued to pressure bonds with the 10-year U.S. Treasury rate piercing key resistance at 3.52 percent. The next stop for the 10-year looks to be last April’s high of 4 percent. The key is the reason and how fast we get there.
The dollar was relatively flat and copper, natural gas, and the foods had good moves. The CRB foodstuffs sub-index and wheat prices are now up over 10 percent for the year. Full blown panic buying and hoarding is driving the market and we expect a G20 crackdown on speculation in the next few months. The EU just released their report on the financialization of commodities and the future exchanges are increasing margin requirements.
Gold is behaving as if monetary policy in the Europe and the U.S. may be changing sooner rather than later and having trouble with the rise in long-term rates. The market also may be concerned about a short-term reversal in capital flows to emerging markets, which would slowdown reserve accumulation. We’ve gotten whipsawed trading the yellow metal in the past few weeks and are waiting patiently to see if first the recent low of $1,311 holds and watching the 200-day moving average at $1,290.
The ECB dismissed rumors of an imminent hike in rates and it now looks like their tough talk on inflation was mainly designed to squeeze the Euro shorts. We may see some follow through selling in the Euro this week. Are the Eurozone countries going to agree to a more uniform retirement age? We restate our position that there is an abundance of short-term liquidity in Europe, but a shortage of political unanimity and the potential for adjustment fatigue. We just witnessed in Egypt how politics can at times be just as unpredictable, volatile, and unstable as markets.
We remain bullish on U.S. equities, particularly transformative tech, such Apple, Micron, Arm Holdings (UK company), among others of the mobile revolution. We’re still concerned about China, emerging equities, and commodities and betting on a nice pullback in crude oil. If concerns grow over a hard landing China, commodities could sell-off hard here.
The key issues for next week: 1) the Bank of England’s decision on monetary policy, where economists now think there is a 33 percent probability of a rate hike, and how markets react if they do hike rates; 2) How the markets and Chinese workers behave after the return from Lunar New Year holiday; and 3) Ron Paul’s first hearing as Chairman of the Domestic Monetary Policy and Technology Subcommittee on Wednesday; and 4) long-term U.S. bond rates; and 5) Bank of Korea on Friday. Have a great week!
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Liquidity which has flowed out from emerging financial markets to US financial market will enable it to perform at least for the 1H2011, but if 10-year yield moves to 4%, may trigger sell-off due to fear of exit of the cheap monetary policy, which looks to be seem unlikely because the underlying US economy is still weak